I assert that long duration government borrowing is “taxation without representation” which is forbidden by the English Bill of Rights of 1689.
Governments have three choices to fund their programmes: taxation, borrowing, and money printing (such as QE). Taxation requires the current generation of taxpayers to pay for the current generation of expenditures. Whereas long duration borrowing requires that some future generation of taxpayers, will pay for the expenditures of today’s generation. That future generation, in many cases will have had no say, no democratic representation, in the decision to defer the necessary taxation to pay for today’s expenditures.
Consider a 30 year government bond created today. Broadly speaking, today’s 20-80 year olds will have voted for the present government and therefore have some accountability for the choice of the present government to borrow for 30 years, the money to pay for today’s expenditures. Let us consider who will repay this bond: the taxpayers of 30 years time. Of that generation of taxpayers, HALF of them will have been too young to vote at the time the bond was created, and those people will have had no representation in the decision to borrow, but remain on the hook for the repayment. This is taxation without representation. On the flip side, the 50-80 year olds of today will enjoy the benefits of the today’s borrowed money, without ever having to take part in repaying it (because they will be dead by then).
In choosing to fund today’s expenditures via borrowing rather than taxation, today’s government (and in a democracy, today’s voters) choose to enrich themselves at the expense of their children’s generation. They avoid the economic loss of taxation today, and pass that economic loss to their children, half of whom will have had no say in the matter. The children will be obligated to pay off the debt, without ever having seen the benefit of it.
Debt-based finance might be tolerable, where the borrowed money is used to create an asset, which will either provide an income itself or enable a desirable service. So government construction of a wind farm generates power over its lifetime which can be sold: an income generating asset. Similarly the construction of a hospital or school or viaduct enables a service to be created or run more efficiently. In these examples, the return on the public sector investment can cover the repayment of the borrowing. Sadly, only around 5% of government expenditures fall into this category.
The vast majority of government expenditure is to cover current day-to-day operating costs: health, social security, education, defence. 8.4% of government spending is paying the interest on the public debt.
Approximately 10% of government expenditure is covered via borrowing, rather than via taxation.
We note in passing that money printing, including QE, is at least as iniquitous as public borrowing. Via the Cantillon Effect, connected insiders (bond holders/traders, private pension funds, etc) benefit from price support for an asset class they already own, while all other holders of the currency suffer the loss of purchasing power caused by the increase in the money supply.
It is my proposition that public sector bodies should not be able to contractually or legally commit future taxpayers to repay their present expenditures. Therefore any public sector borrowing, whose payback period extends beyond the life of the presently elected government (max 5 years), should be illegal, as representing a theft from the future. This can be implemented by making recovery of such debts unenforceable in law.
Yes, this will likely crash the bond market of the local currency. However, as this scheme intends to avoid any future public sector borrowing, the lack of a bond market to enable that becomes irrelevant.
Yes, the government will not be able to fund the 10% of its expenditures which are currently funded via public sector borrowing. However, the government will also no longer need to spend 8.4% of its money on debt interest servicing. Those percentages are very close together.
Day to day short-term borrowing to iron out the peaks and troughs of income and expenditure will still be viable, as it is only on the change of government that public sector debts would become unenforceable.
A more significant impact of this policy is a significant transfer of wealth from the boomer generation to the generations after them. The wealthy bondholders and private sector pensioners will lose out as the value of their bonds goes to zero. However all taxpayers from now on will benefit as we no longer need to throw 8.4% of our tax money on interest payments. The bondholders and pensioners will surely complain. But the riposte is that they should have been paying 10% more tax since 1990 so to cover the full 100% of the expenditures their governments made, and this policy change is merely recovering that unpaid tax in one fell swoop.
If it is cited that not all government borrowing is for 30 years, then we can remind ourselves that the average UK bond maturity is around 14 years, and in any case most redemptions of bonds are financed by merely issuing another new bond. All the while that the public sector debt is increasing (in real terms, rather than as a percentage of GDP) the issue of taxation without representation persists.
Removing long term borrowing from the arsenal of government will have useful side-benefits, in that their ability to spend money on things which the electorate don’t want will be blunted. No more kicking the can down the road. Government accountability will be improved.
The English Bill of Rights of 1689 was instituted to curtail the right of the Crown to act outside of what Parliament had decreed. Among other things, it asserted that taxation could not levied unless Parliament had agreed to it : “That levying Money for or to the Use of the Crowne by pretence of Prerogative without Grant of Parlyament for longer time or in other manner then the same is or shall be granted is Illegall.” The act of taking on long term public sector debt by a present parliament, necessarily commits some future parliament to levy taxation to pay for it, without the either the first parliament or the future second parliament having explicitly agreed to that additional taxation. The principle that no one should be required to pay taxes unless they were represented in the government which determined those taxes, was a chief complaint of the american revolutionaries, and appeared again among the suffragettes (where women were liable for tax but could not vote). Those injustices were rectified, although not painlessly.
I submit that long-dated government debt should be similarly abolished.