The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [45]
The share of government in the economy has increased in all developed countries over the decades, although it varies widely between different countries. At the low end of the spectrum are the United States and Singapore, at the high end the Scandinavian nations and some continental European countries. All of these are prosperous places. The difference in the size of government reflects political and cultural choices made in those societies. However, there is no exception to the general long-term trend of government spending accounting for a rising share of national output. The few partial exceptions reflect either a one-off windfall (such as the United States being able to temporarily cut defense budgets in the early 1990s after the end of the Cold War) or massive and divisive political determination (such as the Thatcher and Reagan years, when the United States and United Kingdom briefly halted the upward climb). Indeed, one of the markers of a country making the transition from developing to developed status is an expansion of government, because the creation of a welfare state is an important means by which citizens can be insured against an uncertain future when they move from village to town or take new jobs.
The catch is that governments have struggled and failed to raise taxes in line with spending. It is much easier to borrow, and indeed there is no reason they shouldn’t borrow. Until his resolve collapsed under the desire to spend, British Labor prime minister Gordon Brown had a so-called “Golden Rule,” that the government could borrow to spend on capital projects such as infrastructure spending, as these would generate a long-term return to the public. Borrowing is also an essential tool for limiting the impact of recessions. Sadly, all such sensible rules—budget rules, or deficit limits as in the Eurozone region—reach a point at which they come unstuck. Governments over and over again have proven unable to commit themselves genuinely to financial discipline. Budget deficits are the norm in the leading economies. Before the financial crisis struck, the average for the rich OECD economies was already about 1.5 percent of GDP (in 2007, a boom year when tax revenues were buoyant). So in almost every rich economy governments have already borrowed some money to finance welfare, health, and pension systems, and will have to borrow a great deal more in the future to continue with these systems.
Estimates of the debt burden implied by commitments to health and pension spending, such as Medicare and Social Security, are harder to come by. One thorough assessment of the U.S. government’s indebtedness, now a few years out of date, estimated this part of the debt at the equivalent of 8 percent of all future GDP, a gap so big it would need a permanent doubling of payroll taxes to close it.6 One estimate, from the OECD, is that the average member country’s government will need to borrow 5 percent of GDP more than they do now within a decade, if there’s no change in the pension and elderly care system.
These long-term deficits and the rising mountain of government debt will become ever harder to finance. Governments can borrow either from those of their own citizens with savings to invest or from foreigners with savings. The former may have distributional implications, as all taxpayers will owe the interest to those who do the lending; but usually the benefits of the borrowing mean that doesn’t matter. The latter type of borrowing is potentially more fraught. The large pools