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People who have forgotten how to cope with recessions and have similarly forgotten, or never knew, how to handle negative equity in housing will soon have to come to terms with a new challenge living with a massive deterioration in Government finances.
Chancellor Alistair Darling warned us what was to come in his famous interview in August when he talked about the difficult global economic situation rather than Government finances. But he knows as well as any that the two go together when the economy sneezes, the Exchequer catches a cold.
This Wednesday, the Chancellor delivers the Mais lecture at the Cass Business School, an annual event that has several times provided the opportunity for Chancellors to signal key policy shifts. Thus the expectation is that Darling will talk about life after the golden rules the voluntary guidelines mapped out by Gordon Brown in his early days to provide a framework for what would be acceptable limits on tax and spending.
This has become necessary because as the economic slowdown tightens its grip on the economy, Government revenues are suffering and the Budget deficit widening.
Roger Bootle of Capital Economics predicts a £70 billion Government borrowing requirement against a Budget-time forecast of £48 billion. Others have suggested that if the pattern of the 1990s recession repeats, it will rise to £100 billion next year. No wonder the Chancellor is looking for a new set of rules. It will need to be a long speech.
Pensions relief but it's rubbish
The sound of stock markets crashing around the world has naturally aroused concern among the millions in pension funds about what this is doing to the health and solvency of their schemes.
They would have been greatly relieved had they received a press release last week from pensions and actuarial consultants Watson Wyatt that delivered surprisingly good news. At the beginning of September, before the turmoil in the markets began in earnest, it calculated the combined deficits in the pension schemes of the FTSE 100 companies to be £12 billion. But by the end of September, this had been turned around and those same schemes were in surplus to the tune of £30 billion. The reason is that though the assets in the pension funds the shares, bonds and property had fallen in value, the liabilities had decreased.
This is because the interest rate used to calculate the liabilities, the rate on AA-rated corporate bonds, has also increased, and a higher discount rate means lower liabilities. If you find that hard to grasp, consider how a given lump of money will be larger in 20 years' time the higher the interest rate paid on it over the period. By the same token, you need less starting capital now to get to a given sum in 20 years than you did last month if the interest rate is higher.
But while this is the truth in the eyes of the accountants, in reality it serves to show what a nonsense they have made of pension-fund accounting.
Pensions can be thought of in economic terms as a claim by an unproductive section of the economy on the productive sector, whether the pensions are funded or unfunded. With the biggest financial meltdown in living memory taking place around us, no one can think the nation is now better able to pay pensions than it was four weeks ago. The situation may be unchanged or it may have worsened but only a lunatic or the accountancy profession would claim it had got better.
This is underlined by a quick explanation of why interest rates on corporate bonds have gone up. It is because the market is more worried now about the health and prospects of companies, and it wants a higher rate to compensate for an increased chance of default. It is the market's way of saying economic conditions have got much worse.
But accounting takes no notice of this. It would have us believe that when the economy looked strong, our pensions were under threat; now the economy is under threat, our pensions are strong. And they charge for this information!
