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2015-12-15 12:11:47
Dec 10th 2015, 10:44 by S.K. | LONDON
MANY suspect governments of protecting increasingly wrinkly electorates over
the young within the big austerity packages imposed since the financial crisis
and recession. While youths have had a particularly rough ride within labour
markets, the overall effects of the response to the crisis are a bit more
complicated. A new issue of Fiscal Studies, an economic journal, published
today compares the austerity packages implemented in six European countries
(Britain, Italy, France, Spain, Ireland and Germany) and would seem to provide
fodder for those who think the young have been given a raw deal.
First, look at investment. When there is a hole to be plugged, governments
might be tempted to slash investment spending and maintain current spending.
This is politically easier; current benefit claimants will squawk more loudly
than those who might have used the now-cancelled roads. The papers show that in
all countries other than France and Germany investment spending was cut more
quickly than current spending--future generations are the main losers of this
prioritisation.
Next, look at the packages of tax-and-benefit changes that governments used to
curtail borrowing. The collection of papers compare net household incomes in
2014 with what they would have been if no policy changes had been made after
the recession (2015 for Britain). They find that in France, Ireland and
Britain, on average working-age household incomes were squeezed harder than
pensioner incomes. In Ireland, where pensioners saw net income cuts of over 5%,
one-earner households saw average cuts of 12.1%. The government protected the
main pensioner benefit, opting to hike property taxes, introduce water charges
and slash working-age benefits instead.
Only in Italy and Germany did working-age incomes fare better than pensioner
incomes at the hands of the axe of austerity. But here one has to be careful.
Germany doesn't really count--it hardly implemented any austerity. That is
because the financial crisis did not blow a hole in the government s public
finances as it did with the others; in the run-up to the crisis its public
finances were not buoyed as much by fickle revenues from things like the
financial sector or property. And in Italy, though pensioner households saw
cuts of 4.6%, compared to 1.9% for working-age households with children, and
2.7% for those without, the authors of the paper note that the reforms only
marginally rebalanced a system that was already biased towards the elderly.
Looking at the snapshot effects of reforms to date could give a misleading
picture of intergenerational redistribution. Savings in Italy were made by
changing the rules for indexing pensions, which shows up as a cut to pensioner
incomes in the short run, but cumulates in the long run into bigger cuts to the
pension promises of younger generations. In other words, while the effect now
is likely to be larger on the currently retired, over their lifetimes the
picture looks less rosy for younger generations. Hopefully future generations
will be so filthy rich that financing their parents pensions will be a breeze.
Hopefully.
The other thing people point to support the idea that the young have been
particularly hard done by is the huge accumulation of public sector debt over
the financial crisis (see blog from Simon Wren-Lewis from Oxford University on
this here). While it is possible for the debt burden to take its toll on future
generations disproportionately, the alternative where governments had avoided
taking on debt, and instead had slammed the brakes on borrowing even more
quickly would likely have wreaked even more havoc on younger generations
through the spill-over effects on the macroeconomy. As usual, the answer to
whether younger generations have been screwed is "it s complicated".