The government has closed up shop. The debt ceiling might not be lifted. The country will grind to a halt, and the credibility of what remains the world's reserve currency has been shot to pieces. To listen to most mainstream commentary on the budget crisis in America, the shutdown is a disaster, and investors are rightly fleeing the dollar until the crisis is resolved.
There has been a lot of finger-wagging from the rest of the world too, with presidents and finance ministers telling the Americans to sort themselves out, and compromise on a budget deal before the fragile recovery in the global economy is put at risk.
But actually they have got it wrong. A government shutdown is an excellent idea. In fact, we should try shutting down our own government for a few weeks rather than remaining in denial about a state that has grown far too large, and taken on far more obligations than it will ever be able to meet.
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To start with, America is now having a proper debate about the size of the state and the long-term obligations the government has taken on and not just burying its head in the sand in the way our government still is. America, much like most European nations over the last two decades, has steadily increased the number of services its citizens are entitled to. The cost of medical care has expanded vastly. It has taken on more and more responsibility for pensions, for relieving poverty, as well as maintaining a very high level of military spending compared to other countries.
The result has been that state spending has been climbing steadily federal spending has risen from 17% of GDP in 2000 to 23% now. Since taxes have not risen by nearly as much, the deficit keeps on getting bigger and bigger. More worryingly still, the government has committed itself to vast future commitments. With an ageing population, healthcare and pensions are going to cost more and more and the state is promising to pay for much of it.
Does any of that sound familiar? Of course it does. We have done precisely the same thing in this country, on an even greater scale. Public spending has expanded from about 35% of GDP 20 years ago to close to 50% of GDP now. We have an open-ended commitment to free healthcare and have guaranteed fantastically generous pensions to public-sector workers. We are now under-writing the housing market by guaranteeing mortgages, not long after the state took on the liabilities of much of the banking industry.
Take those state-sector pensions, for example. According to a report by the Intergenerational Foundation, they have added £1.2trn to the future liabilities of the government. In total, 78,000 state workers are entitled to pensions of more than the average wage of £25,000 although no system has been put in place to pay for them. And yet how much serious debate has there been about that? Almost none. The coalition talks about austerity, but has not done anything beyond marginally slowing the rate of growth of public spending. It is still going up and will only come down as a percentage of GDP if by some miracle the economy starts to grow very quickly again. A shutdown would be a very simple way of demonstrating that much of what the state is planning to do is simply unaffordable.
Next, a shutdown would be a useful experiment anyway. America probably cannot afford to do everything the government has promised to do and certainly not if people do not want to pay much higher taxes. The same is true in this country even more dramatically. In 2013 our deficit will still come to 7.3% of GDP, even though the economy is now expanding again.
That is the fifth highest deficit in the world (the four countries ahead of us are Egypt, Pakistan, Venezuela and Japan hardly great company to be keeping). It is hard to imagine that taxes will ever rise enough to close that deficit. Even if they were put up, revenues would simply fall, so the money wouldn't be collected. At some point, the scale of the state's commitments will have to be drastically scaled back.
What better way of working out how to achieve that than with a shutdown? Do we really need libraries? Or Sure Start centres? Or parking wardens? Or the social services department? Will people starve if you stop their tax credits or simply find other ways of making ends meet? Surely the quickest way to find out would be to close them down and see how we get along without them. We might find we cope perfectly well.
What America is doing is taking a hard, serious look at what the government is doing, and what commitments it is taking on for future generations, and having a robust debate about them. Sure, that is messy at times. But it is also healthy. If our parliament had a proper sense of its responsibilities, it would refuse to give the government any more money for a month. Shut down most non-essential services, and see how we get on my bet would be we need a lot less government than we think we do.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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