Source : THE AGE NEWS
By Sam Ashworth-Hayes
If you wanted a reason to be pessimistic about the future of Western democracies – besides the low birth rates, internal strife and rising competing powers – you could do a lot worse than look at two fiscal rows, one in Westminster and one in Washington.
Between them, a hidden failure mode in democracy has been put on full display.
Elon Musk was at odds with Donald Trump over the president’s “big, beautiful bill”.Credit: Bloomberg
In Britain, Sir Keir Starmer is on the ropes after being forced into an about-turn on cuts to winter fuel payments, with left-wing MPs demanding an end to the child benefit cap while opposing cuts to disability benefits.
Meanwhile, the International Monetary Fund is bluntly stating that Britain has no more room to borrow within its fiscal rules, squeezing the PM and Chancellor Rachel Reeves from the other direction.
In the US, Elon Musk has stepped down from Donald Trump’s government after criticising the president’s “big, beautiful bill” and its trillions in tax cuts.
Musk’s “scheduled time as a special government employee” may have come to its end, but with sources indicating he made the announcement before any formal conversation with the president and after this public criticism, his departure is a further reason for pessimism.
Having claimed to have saved $US175 billion ($271 billion) through the Department of Government Efficiency (DOGE), the tech billionaire is now watching in horror as the president sets up a $US2.3 trillion expansion in America’s deficit over the next decade.
To say, as Musk has, that this “undermines the work” DOGE has done to date is an understatement: Trump is about to spend its total savings 13 times over.
Posting on his social media platform X, Musk has indicated his disappointment with the unwillingness of Republicans to carry out spending cuts, musing that the only way out of the “bankruptcy of America” is to radically boost GDP growth.
It’s difficult to disagree with his assessment, or to find much reason for optimism in either Britain or America.
Trump and Starmer are very different leaders leading very different countries, but they face the same core question: how do you keep the show on the road when your voters demand more spending?
The demographic challenges facing both countries are well known: an older population has more voters who no longer work, who vote themselves a larger share of income, which increases fiscal pressure on the young and weighing on birth rates.
It’s a doom-loop that the West’s democracies have yet to find an escape from.
Growing our way out of trouble would require a technological revolution. Older voters prioritise healthcare and pensions ahead of investment in infrastructure or education, which reduces the funds available for pro-growth policies. Worse still, redistribution requires taxation that directly weighs on economic activity.
If Musk succeeds in solving AI, robotics and space exploration, then we might get the resources and growth we need to escape the spiral, just as the Industrial Revolution pulled us out of the Malthusian trap. If he doesn’t, we’ll need another way out of this mess.
Solving demographics isn’t the answer. Boosting birth rates is a necessary long-term fix, but doesn’t address the more pressing present concerns.
Short of drawing on Jonathan Swift’s A Modest Proposal and rendering workers into Soylent Green at retirement age, there’s no obvious policy that will. And if we’re stuck with our inverted pyramid of people, that leaves us with “democracy” as the factor most likely to give way.
About 48 per cent of all UK public spending goes on welfare, health and social care and debt interest spending. These are the items of spending that are either too toxic to touch – imagine the outrage if Starmer stood up and announced an end to the triple lock, or swinging cuts to the bloated NHS – or would tip the country into a financial crisis via defaulting on our obligations.
The UK and US both have older populations with more voters who no longer work, who want a larger share of income.Credit: Bloomberg
They’re also some of the items with the most forecast growth, as today’s young become tomorrow’s old. The state pension is set to hit 8 per cent of GDP, health spending 15 per cent and adult social care somewhere about 2.5 per cent. A little over 25 pence in every pound earned in Britain will be earmarked for these line items alone.
If we can’t cut spending democratically, we’ll be made to cut it. And cutting spending democratically is hard.
One implication of the median voter theorem – the observation that in a democratic system, the man in the middle tends to get his way – is that when median incomes are below the mean, the state will tend to engage in more redistribution.
This is certainly true in Britain, where 53 per cent of the population lives in households that pay less in taxes than they receive in benefits, and it’s likely to be true in the United States as well (where the top and bottom quintiles are net losers and net beneficiaries, respectively).
In fact, “democracies spend more” seems to be a good general rule. Match V-Dem democracy scores to IMF data and – with some caveats around matching names and entries – the general gist is that more democratic countries spend somewhere about 12-15 points of GDP more than their less democratic peers, with researchers emphasising spending on social protection and education.
Combine this with the observation that it’s entirely possible for older generations to burden their younger successors with debts, and you have a recipe for disaster.
The incentives given to today’s politicians are to spend to win today’s votes. Unless voters today are altruistic about future generations – and when the population is ageing because fewer people have children, their motive to be so is greatly reduced – then you can end up in the sort of unsustainable spiral Britain and America have found themselves in.
By 2055, the US national debt is expected to be 156 per cent of GDP, and deficits around 7 per cent. In Britain, it’s for 130 per cent of GDP, and a deficit of 9 per cent. Project that out to 2073, and debt hits 274 per cent of GDP, with the deficit a healthy 21 per cent of national income.
If politicians ignore the warning signs – or voters punish those who attempt to correct course – we could find the choice between debt and democracy made for us.
These are ludicrous numbers. There is no prospect of funding that sort of deficit at that sort of debt. The question is what we’ll get instead.
The most likely answer seems to be some form of fiscal cliff-edge ending up with less democratic choice in government. This could take a “soft” form, such as self-imposed restrictions on spending and debt which politicians agree to adhere to in order to restore market confidence.
A souped-up form of the Office for Budget Responsibility and harsher fiscal rules would be one version of this. Government by bond market – where investors demand higher yields for risky policies, driving the state towards fiscal consolidation – would be another.
At the other end of the scale, a debt bailout would effectively cede a large degree of sovereignty to whichever institution sets the terms of the loan. Britain has been down this road before, in 1976, when the IMF imposed higher taxes and lower spending.
This would be an extreme outcome. It is not entirely out of the range of possibilities.
Cutting spending democratically is hard. Undermining institutions is relatively easy.
If politicians ignore the warning signs – or voters punish those who attempt to correct course – we could find the choice between debt and democracy made for us.
The Telegraph, London
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