Cashflow mentality exposes government short-termism

Angus Hanton points to the negative intergenerational implications in four key areas of government policy

The government’s way of thinking about its finances starkly illustrates how it habitually thinks in a short-term way. In some areas it even refuses to calculate its total liabilities, but even where these have been worked out the government prefers to present figures showing that it can meet the necessary payments in the short term. This is illustrated in four areas.

1. Student tuition fees – Willetts encourages short-term thinking

Tuition fees have just been increased by £10 billion per year (roughly £5000 extra for 2 million students), yet the Minister for Universities and Science, David Willetts, mostly argues that these fees are justifiable because students will be able to afford the interest payments on the debts. In a recent interview he made the surprising claim that students under the higher-fees regime will be better off because their monthly payments will be lower when they start repaying the loans.

This reveals the sort of short-term thinking that is at the heart of government. Students are not so easily fooled – they understand fully that they are being made to take on serious debts and that this is a way to convince them to take on debts that were previously paid by society as a whole. These “loans” are seen by many as a way for the government to shift its liabilities elsewhere but, even though they are personalised, they are still a liability for the next generation.

2. Government employee pensions – cashflow is king

This short-term thinking is also illustrated by the government’s thinking over the unfunded liability for its own employees’ pensions. These in total amount to about £1.25 trillion (£1,250,000,000,000, or almost £50,000 per UK household) but the government almost always refers to the annual cost of paying these pensions – the cashflow impact.

This of course is quite low because the government is looking only at the current year’s net position – total payments out minus the contributions that people make, ignoring the rapid growth in the outstanding liability. Largely for this reason, it doesn’t want government employees opting out of the government schemes – it would make the cashflow position much worse.

In the case of its other great pensions liability, the State Pension commitment, it even refuses to estimate the present-day size of that liability. A recent question from the Intergenerational Foundation to Iain Duncan-Smith (Secretary of State for Work and Pensions) about this liability was met with a total refusal to estimate its size (independent observers reckon it’s probably around £2 trillion).

3. Nuclear decommissioning costs – intergenerational liabilities

The Nuclear Decommissioning Authority has fairly open accounts and breaks down its decommissioning costs by the different sites for which it is responsible. However, it is clear that its focus is not on the size of the total liability for decommissioning but on whether the year-to-year costs can be met.

In this way, by concentrating on the year-to-year payments, the government has progressively built up a total liability of about £70 billion for future generations to pay – for which no significant funding has been set aside.

4. Payment of interest on National Debt – cashflow of the annual bill

In the case of the Official National Debt (which represents between a half and a quarter of real total government liabilities), the government looks at what it pays in interest through its bonds. With current low interest rates this annual payment looks affordable.

The next generation may well have to pay higher rates of interest, and even for cashflow purposes it would seem sensible to work out what the annual interest bill would be at different interest rates, especially at higher rates.

How can the government be made to think more long-term?

The problem in all these areas from the intergenerational perspective is that government doesn’t focus enough on the long term. Cashflow is essentially a short-term concern and the government’s increasing focus on it is clear evidence that it is compulsively short-termist.

Long-term thinking might be improved if the government were forced to properly calculate its total liabilities and work out what its repayment costs would be at various interest rates.

Perhaps longer-term thinking could be institutionalised through an ombudsman or maybe a new law whereby every budget had to be assessed in terms of its intergenerational impact. Many countries have intergenerational fairness written into their constitutions and this would be one major reason for the UK to adopt a written constitution.

Posted on: 23 August, 2011