National debts have risen sharply during the crisis – typically, they look set to hit 100% of GDP in OECD countries. But could they go higher – to 200, 300 or even 400% of GDP? That’s the worrying scenario set out in a paper from three economists at the Bank for International Settlements, the international organisation of central banks. Writing in a personal capacity, the team warns that rapidly ageing populations could lead to huge increases in government borrowing over the coming decades.
Unless action is taken, they say, those rises could eventually dwarf the debt run-up seen during the crisis. Countries in the OECD area, but also the “BRIC” economies, look set to see a growing imbalance in their populations over the coming decades. As people live longer and fewer babies are born, the size of the workforce will shrink and there will be fewer people of working age to support retirees. In the OECD zone in 2000 there were about 27 retirees for every 100 workers, according to the OECD Factbook ; by 2050, the proportion of retirees is forecast to hit 62, and in some countries there will be one retiree for every worker. That combination will hit governments hard: Fewer workers means they’ll be taking in less in tax, while more retirees means higher pension payments and healthcare bills.
The BIS team warns that the cost of fulfilling current government spending commitments means that by 2020 national debt would soar to 300% of GDP in Japan, 200% in the U.K., and 150% in Belgium, France, Ireland, Greece, Italy and the U.S. Their longer-term projections are even more startling, and warn of debt above 400% in the U.S. and 500% in the U.K by 2040. Clearly, such increases would be unsustainable.
For one thing, financial markets would probably stop lending to a country long before debts hit such levels. For another, the cost of paying off the interest on these debts would suck huge sums of productive capital out of the economy in the form of tax. “With a debt level that is two or three or four times your earnings each year, that just won’t work – you won’t be able to service that debt,” the team’s leader, Stephen Cecchetti, told the BBC . “The lesson here is not that this is going to happen – it almost certainly can’t happen,” he added, “the lesson is that something has to change.”
In fact, there are already signs that some change is happening, with a number of countries moving to raise retirement ages. That’s something we’re likely to see more of in the years – and decades – to come.
A common reaction to the earthquake in Haiti has been to talk about the country as “cursed”. This could give the impression that what happened is somehow beyond human capacity to forestall. But one of the most chilling aspects of the earthquake is the lack of surprise expressed by experts from a number of domains about the scale of the destruction and loss of life.
In his 2009 Mallet-Milne Lecture on The Seismic Future of Cities, Roger Bilham stated that “It should be appalling to the people of the world that in 2009, more than a 100 years after earthquake resistant construction began to be understood and implemented by engineers, that it is possible to write an article forecasting large numbers of future earthquake fatalities from the collapse of cities.
For Professor Bilham and his colleagues, geophysics is only part of the explanation. Loss of life on the scale seen in Haiti is not “natural” in the modern world. A similar quake that hit the Japanese city of Kobe in 1995 caused widespread destruction and even if it killed 6434 people, casualties in this densely-populated area were far less than in Port-au-Prince.
Why did Haiti’s capital collapse? It’s on a well-known seismic fault line and has experienced shocks before, but nothing seemed to be built to resist earthquakes. Even the presidential palace was destroyed. For Bilham, it’s a political question. “In some cities… corruption has effectively replaced governance… Officials and politicians may find themselves being pressured to exercise flexibility in the interpretation of building codes. The resulting structures may contain numerous violations, to be discovered only when the structure collapses.”
But what does governance mean here? An OECD report cited Haiti as a “paradigmatic example” of the severest form of fragile state, where the legitimacy of the state is challenged, where the states’ capabilities and resources are low and where there are only rudimentary or fractured political processes for handling the resultant tensions. (more…)