Last week I wrote about how it’s ok for governments to spend more than their tax take when the economy is depressed. This week I’m going show that while additional spending can be helpful to kick-starting the economy, there are good things to spend the money on, and there are less good things.
The current government made a big fuss in 2010 about how it was going to protect the incomes of pensioners by guaranteeing to increase the Basic State Pension by the highest of inflation (the Retail Prices Index), average earnings, or 2.5%. This might seem like a nice policy, something to make us all feel warm and fuzzy about making sure that pensions can take care of themselves.
However, this policy has been incredibly expensive. In 2012/13 RPI inflation was 2.6% and average earnings fell by 0.3%, so all the oldsters got an additional 2.6%. The total spend on the Basic State Pension in 2011/12 was £74.2bn. Therefore increasing the pension rate by 2.6% increased the spend on State Pension by £1.9bn. The value of the increase above average earnings (2.6% – -0.3%) was worth around a quarter of a billion pounds.
Since then each year pensions have got another 2.5%. Boom – another cool two billion to spend on cruises and Werthers Originals. Average earnings have picked up but continue to grow at less than 2.5%.
The problem with this is that there are many, many more things that government could spend money on which would do more good for the country than shovelling cash into the pockets of old people. For example, the UK Apprenticeships programme has been successful providing young people with skills that employers explicitly want. It has been evaluated as adding £18 to the economy for every pound of government money spend on it. That is a return of 1800%. Not bad Vince. Not bad.
You might be asking what is the return on spending on pensions. Zilch. A pound spent on pensions is merely moving money from one pocket to another.
In 2013/14 the total spend on all Enterprise and Skills programmes in the UK was £4bn. The increase in spending on State Pension was half of the total spend on Enterprise and Skills.
If just a quarter of that increase were used for Apprenticeships that would mean the economy would not be only £250m better off, it would be £4.5bn better off.
Crappy spending decisions like the Triple Lock is why governments that listen disproportionately to old people are not good economic stewards.
Young people: Vote!
Older people, if you want your children and grandchildren to live in a wealthy society, don’t listen to the siren calls of bigger cash transfers. (and tell your children and grandchildren to vote).