Opinion: ‘Things can’t stay like this forever’

‘The past is a foreign country. They do things differently there.’

Quite profound and one of my all-time favourite quotes. I never read the book – I simply picked it up from the cover of a Waterstone’s bag. If I had actually read it, I might not have spent so much time in my youth wondering how the author had then gone on to write about fly fishing.

Recently, this quote, and the current state of the world, has got me thinking a bit profoundly about a few things. If you understood the pop cultural reference, there’s a fair chance that, like me, you spend a lot of time nowadays perplexed, trying to understand how the current political and economic consensus evolved from what it was in the mid-eighties.

Obviously, I’ve just gotten older, but many beliefs from the 80s, like faith in free enterprise and the free market, which were once axiomatic, are no longer blindly accepted, and I struggle to get that. OK, so we got to the end of the decade, and Oliver Stone made us realise things had been a bit overdone, but I would never have imagined back then parts of the current zeitgeist – the scale of the state and the belief in big government – that exists today.

I blame the government – a flippant comment, but only half in jest. Government action, or rather central bank action on behalf of governments, particularly the ‘QE experiment’ during the global financial crisis, the euro crisis, and most recently, Covid-19, is, in my view, the root cause of this shift. We’ve ended up as a society that believes continual deferral is a sustainable economic strategy, leading to a level of economic immaturity unimaginable 40 years ago. We’ve developed a belief in a magic wand. Headinthesandonomics.

But deferral as an economic strategy appears to have become the global norm. You might have missed it if you were focused on local events, but last Friday, the US posted a $1.7 trillion deficit for its 2023 fiscal year – that’s extra borrowing equivalent to half of ALL existing UK government debt, in just one year.

The total US debt, $33.6 trillion, is now around 120% of US GDP, with some projections suggesting it could reach 180% of GDP by 2050. Bill Clinton eradicating the twin US deficits certainly seems like ancient history today. But not to be outdone, China’s government debt has doubled in a decade to 80% of GDP today, and China’s corporate and household debt levels are the highest in the world. And China’s legislature has just formally approved increasing the deficit ratio.

Those US and China debt numbers are really big and worrying. They paint a dark picture for global inflationary prospects and interest rates. I’ve mentioned Sloan’s law before – that things can be unsustainable for a very, very long time – and this ‘last Thursday of the month’ Guernsey Press column isn’t necessarily the time and place to get into it too deeply, but honestly things can’t stay like this forever.

There’s going to be problems down the road. ‘Bond King’ Bill Gross tweeted this week that ‘this “higher for longer” thing is yesterday’s mantra’. It takes self-confidence to disagree with Bill, but if both the US and China continue down this fiscal path, there’s a good chance that inflation and interest rates end up ‘even higher for even longer’. Perhaps our timescales don’t match.

Speaking of foreign countries and doing things differently, the EU is an interesting case in point. Awkward segue, I know. We never quite understood it, did we? By ‘we’, I mean the Brits. Perhaps I mean the English but attributing the English way of thinking to the populations of the four corners of the British Isles is a bit of a cultural faux pas. However, I’m not entirely sure that English thinking is so homogeneous either. Before I lose myself in a digressive rabbit hole, I better get to the point.

We (Brits/English/whomever) were never quite able to understand the way the EU worked, particularly after the Lisbon Treaty changes. We never got our head around the institutional arrangements. Regardless of one’s position on the Brexit divide, none of us, politically brought up on Westminster parliamentary democracy, could really comprehend how the European Commission, the civil service, can instigate legislation when the European Parliament, composed of elected politicians, can’t. That’s not a true democratic system, is it? It’s understandable why the EU is often likened to a political caste system and accused of groupthink.

But what relevance is this now? Because the EU’s groupthink moved forward significantly this week. On Monday, the EU Tax Observatory published a report calling for a minimum wealth tax of 2% on billionaires.

The EU Tax Observatory is an interesting animal and another marvellous example of the EU’s curious institutional arrangement. It’s a think tank funded by the EU. It also just happens to be made up of the same French economists who have shaped the current public consensus view on taxation. The world view that goes ‘because you can afford it, you should pay more (tax)’, a perspective that would also have been an anathema in the 1980s.

I make no predictions about the long-term impact of the EU Tax Observatory’s latest policy position, but it’s unlikely to be favourable for our offshore finance sector, given that none of its previous policy positions have benefited us. More problems down the road.

I suspect it’s the current dark times that have made me cheerless again this month. War in Eastern Europe, war in the Middle East, and the concern of war in the Far East – it’s enough to dampen anyone’s spirit. Yet, right now, we need spirit in abundance, especially to address our significant global problems, not least climate change which I know I’m prone to witter on about. COP28 is a few weeks away – one just needs to set aside the mild incongruity of it taking place in Dubai – and it’s quite worrying that climate change mitigation has fallen significantly down the policy agenda (granted due to pressing concerns such as war).

But climate change is especially ill-suited to a deferral strategy – today’s youth must keep the climate change issue front and centre, particularly in the minds of older policy-makers. That was my advice to the young people at ‘My Guernsey Future’ at Government House the other week – a splendid initiative supporting the younger generation’s concerns on climate change and the environment.

In these dark times, when they themselves become a foreign country, we may well look back on the immediate aftermath of Covid-19 as the calm before the storm. Certainly, there’s so much to do on so many fronts, at times it seems all that’s happened in the 40 years is the storing up of future problems.

Postscript: It was an honour becoming part of the-established States Fiscal Policy Panel. The panel published its report about 10 days before last week’s tax and spending debate on the F&IP, and its analysis got lost in the political debate. I recommend reading it. It wouldn’t be appropriate to separately comment on the various proposals in these pages. But I believe I’m on safe ground lifting this one abridged line from the report: ‘Overall, we find that Guernsey ... has recently been travelling on an unsustainable fiscal path.’