Friday, March 5, 2010

What does the end game look like?

for the democracies that must reduce their budget deficits?
Spending must be cut or taxpayers must pay more. Many political battles of the next few years will be fought on these simple lines, with taxpayers on one side and the beneficiaries of public spending on the other. One imminent battle will be between taxpayers and public-sector workers. In some countries, one party can be seen as representing taxpayers (the Conservatives in Britain and the Republicans in America) and the other the workers (Labour and the Democrats, respectively).
Another of these fights will be between generations. In America the biggest medium-term budget busters are pensions and health care for the old. A big deficit may ease the economic pain in the short term but risks saddling the next generation with a growth-sapping burden of higher taxes and interest payments.

Advice drawn from other countries experience:
Raising the retirement age, probably to 70, and cutting the public-sector pension bill will deliver only modest savings in the short run, but will immensely improve the long-term picture. It will, however, be staggeringly unpopular. The proportion of the population in or nearing retirement is increasing; and older people are much more likely to vote than younger citizens. Without reform, however, those apathetic young voters face a crippling tax burden.
There are many battles over deficits to come: taxpayers against public-sector workers; old against young. Well-chosen policies that foster growth may make them less fierce. They may be bloody even so.

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