In March 2013, UK Public Sector Net Debt (PSND) stood at £1.2 trillion but even with austerity, the government will continue to borrow large sums for many years meaning this indebtedness figure will rise substantially. Interest will have to be paid on that debt for many decades to come and ultimately the debt will have to be repaid. However, this is not the end of the story and many would argue that there are other major public sector liabilities which are not shown on government balance sheets the most significant of which are “black holes” on public sector final salary pension schemes and liabilities stretching out for decades on PFI projects
Currently, there is unrest about these matters. A wave of public sector strikes are clearly stoked by a deep well of discontent about Government plans to reform public sector pension schemes and do something about the black holes. Also, we see certain NHS Trusts, hampered by the legacy of PFI projects, initiated many years ago when there was an expectation of continued and significant growth in funding, faced with the problem of dealing with large financial deficits. These deficits can only be dealt with by rationalisation of service provision – a very unpopular task in the eyes of the public who would prefer to see the Trusts “bailed out” by the Government.
In all of this, an important factor to be borne in mind is that of inter-generational equity (IGE) or fairness between generations. Many of the so-called “baby boomers” had the advantage of free university places, a free NHS and a final salary pension scheme. Also, as they get older they will be placing increasing burdens on the health and social care system and extracting pensions for state schemes well above what they have contributed to the scheme. Forget about soaking the rich or squeezing the bankers. It will not happen other than through tokenism. The only people who can pay for this are our children and grandchildren who face university loans, high mortgage payments and inadequate pensions. Are we being fair to future generations by trying to protect our own benefits?
In many ways, IGE has always been politically sensitive issue but trends in society (the ageing population) and economic trends (e.g. declining growth rates) have brought the issue to the forefront of debate. The population of most OECD countries is rapidly ageing. This means that the demand for public services such as health care, pensions and unemployment are likely to increase significantly over time. Traditionally, financial systems were premised on the assumption that economic growth would outweigh the growing obligations deriving from an ageing population. This is no longer the case and ageing populations will have significant implications for societies. However, there are now a number of contemporary issues which, at the current time, are raising concerns about the extent to which IGE is being achieved in the current economic sphere. Some of these are discussed briefly below.
Firstly, pensions. The basic state pension in the UK is an unfunded scheme whereby payments to today’s pensioners are made not from their accrued contributions but from the tax revenues obtained from current taxpayers. Similarly, future generations of pensioners will have their pensions paid from the tax revenues from future generations of taxpayers. The raising of the age for receiving pensions (and possibly other changes) will mean that those paying taxes to finance the current generation of pensioners will themselves receive less generous treatment when they reach old age. Also, most occupational pension schemes in the public sector are largely final salary schemes. Currently many public sector pension schemes are projecting very large actuarial deficits (or black holes) and it is by no means clear how these will be resolved. One possible implication is that the burden of eliminating such deficits will fall, in part, on current generations of taxpayers who, themselves, will not have access to final salary schemes
Secondly, over the last two decades, a large proportion of capital formation in the UK public sector has been financed by some form of public-private partnership, most notably the private finance initiative (PFI). The essence of such PFI approaches are that while services derived from the fixed assets produced will be consumed by current citizens from many generations in society the costs of the project will be spread over a thirty year period through the PFI mechanism and paid for by future generations.
Thirdly, there is the issue of financial sustainability of public services meaning public authorities having access to sufficient finance to make it possible to maintain services, in the long-term, at their current quality and intensity, for both existing and future generations of customers or claimants. Public services of various types are made available to citizens by Government and those public services are in turn financed by the tax revenues collected by Government from its citizens. IGE involves consideration of situations where if one generation is receiving the benefit of government programs financed by deficit spending and debt accumulation, to what extent does the resulting higher debt impose risks and costs on future generations? Following the great recession in 2008, many countries have followed policies of financial austerity. However, it is still the case that Governments are spending more than the revenues they collect and this is being financed by large scale borrowing which in turns adds to public debt. Clearly the burden of financing and repaying that debt will fall to future generations many decades hence. In the light of this there must be serious questions about the ability to have financial sustainability (as described above) in public services and future generations may well be faced with lower access and standards of service having already paid from higher standards of service consumed by earlier generations.
So, overall, how big is the scale of inter-generational equity (or inequity) in the UK? Nobody really knows as there is no clear information about its magnitude in financial terms. Attempts have been made, using complex statistical analysis of available information to estimate what the magnitude might be and the results of such exercises suggest inter-generational inequities are very large indeed.
Given the likely magnitude of IGE, this begs the question as to whether information on IGE (which politicians may prefer to keep hidden) should be publically disclosed in the statutory financial accounts of public bodies. Strong criticisms are often been made about the limited relevance and usefulness of current public sector financial reporting frameworks in relation to either of the above purposes. Hence one might ask whether such usefulness and relevance might be enhanced by incorporating into these frameworks information to inform stakeholders about the level of IGE and the future financial sustainability of public services.
Clearly, IGE is a big issue which should be brought into the open and not kept hidden away which is what politicians would prefer.
A fuller version of this can be found in the December issue of Public Finance. http://www.publicfinance.co.uk/