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The morality of debt
You may have heard the recent episode of Radio 4’s Moral Maze on debt, on which I appeared. Debt is currently a hot topic. As well as dominating the headlines because of the situation in Europe, economic historian Niall Ferguson is emphasising the problems caused by debt in his Reith Lectures for the BBC.
Ferguson is disturbed, not only by the publicly published figures for government debt, but by the refusal of governments to take account of far greater unfunded liabilities that will be incurred by welfare schemes in the future: “The most recent estimate for the difference between the net present value of US federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly 13 times the debt as stated by the US Treasury”.
We saw an example of how such government accounting works in practice recently in the UK when the Treasury bailed out the Royal Mail pension scheme. The fund’s £38 billion of liabilities represents pensions that will have to be paid, yet these liabilities will not appear in the government’s accounts. Not so the £28 billion of assets, however; these immediately went to boost April’s public sector net borrowing requirement. Instead of showing a year-on-year increase from £9.1 billion to £11.5 billion, the Post Office pension fund’s assets produced a miraculous immediate public sector surplus of £16.5 billion. Ferguson claims that the last corporation to publish financial statements as misleading as the accounts of most governments was Enron.
“The heart of the matter,” says Ferguson, “is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn.” These growing liabilities, he says, can only be paid for through future increases in taxation or reductions in other public services.
When I was on the Moral Maze, I was taken to task by Michael Portillo for not stigmatising debtors. I tried to point out that there is good debt and bad debt. As Ferguson reminded us in his first Reith Lecture, the British empire was built upon borrowing. However we should surely make a distinction between loans that provide a productive long term future benefit and those used simply to finance unaffordable consumption.
On the Moral Maze, Claire Fox seemed unimpressed with my suggestion that saving was intrinsically moral, encouraging as it does independence, responsibility and self-reliance. Not only do savers become less dependant upon the state but, as I wished I had said, it makes them almost the only sector of society that is considering the long-term, unlike politicians and the City.
In retrospect, I should have responded to her calling savers who hang onto their money “miserly”. I ought to have pointed out that if someone has worked hard and paid their taxes, it is entirely up to them what they choose to do with their money.
Since the programme, I have been mulling over other examples of immorality relating to debt. To my mind:
• It is immoral to live beyond your means if you know you have no realistic chance of repaying your debts.
• It is immoral to encourage people to take on debt obligations they don’t understand or can’t hope to service.
• It is immoral to depress interest rates artificially so that money is “stolen” involuntarily from savers and pensioners. They may have saved for much of their lives to provide for their later years. They thought they were doing the “right thing”, yet are losing money which is going to help out borrowers, many of whom have been imprudent.
• It is immoral to allow children to leave school without a basic understanding of personal finance. (This, at least, is in the process of being addressed; the All Party Parliamentary Group on Financial Education for Young People is calling for personal finance education to be a compulsory part of the school curriculum).
• It is immoral to encourage debt to boost consumer spending and thus create a false sense of prosperity.
• It is immoral for governments entrusted with the nation’s well-being to get the country’s finances into such dire state that we are condemning future generations to debt serfdom.
Britain is one of the most heavily indebted industrial nations, both at the national and at the household level. The generally-held view that household debt is being paid down is misleading. It is a subject we shall be return to in future blogs.