The End of the Age of Entitlement: 10 Years On

23 October, 2023

It is a great honour to be invited back to the Institute of Economic Affairs, after an interlude of more than ten years, to offer a sequel, in this case, to my last major speech here, “The End of the Age of Entitlement”.

I have some trepidation.

“Back to the Future 2” was a major sequel box office flop. In many ways I am going back to the future.

Perhaps when it comes to ending entitlements it’s more like “Mission Impossible”, which ironically ended up with seven films in the end so we could be here a while.

The reasons for a discussion about the role of society-wide government entitlements remains as urgent as ever.

Whilst we may feel that we have lost the war on entitlements and government spending, there is hope that, through innovation, we can restrain the worst of ourselves and thus give the generations beyond a better quality of life.

My speech more than a decade ago on unrestrained government spending went unheeded. I warned back then, to quote, that “the reality can no longer be avoided”, government spending programs must be wound back.

To vainly quote myself again…. “The problem arises ….. when there is a belief that one person has a right to a good or service that someone else will pay for. It is this sense of entitlement that afflicts not only individuals but also entire societies. And governments are to blame for portraying taxpayer’s money as something removed from the labour of another person.”

In over a decade, nothing has changed. In fact, the problem is deeper and has become more entrenched than ever as inter-generational dependency takes a grip on government spending.

Most governments are spending more, taxing more and borrowing more than a decade ago.

This has fueled higher inflation. And inflation is effectively an indiscriminate tax that makes rich people with assets richer, and the rest of the community poorer.

As John Maynard Keynes noted by “… continuing a process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens”.

Lower income families tend to spend everything they earn on the essentials of life from housing and food, to fuel and shelter. When those prices go up because of inflation there is often no compensation.

They can demand higher wages and more welfare, but employers and governments are slow to respond knowing that higher wages in turn fuel higher inflation.

When Milton Friedman, arguably the most significant economist of the last half century, died in 2006, he was lauded by presidents and prime ministers, central bankers and business leaders all lauded his wisdom as well.

He described inflation as an “old, old disease. We have had thousands of years of experience of it”. And he added that “the only cure for inflation is to reduce the rate at which total spending is growing’.

Freidman argued that increasing interest rates is the best solution for reducing money in the economy. It is, however, as I know, a very blunt instrument.

The more government spends, the higher interest rates will go, in a full employment economy.

We need to have fiscal and monetary policy walking in the same direction.

On that formula we are flailing.

Since I was last at the Institute, the United States has increased its general government spending from 39% of GDP to 45% in 2021. The United Kingdom has increased the size of government from 44% to 48% in the same period and Australia from 38% to 42%. Even taking into account the impact of COVID-19, governments are much larger today than they were a decade ago.

And that growth is overwhelmingly funded by more debt. We are borrowing money from our children to pay for our entitlements today.

Since 2012, Government debt in the UK has increased by nearly 25%. In the US by 40% and in in Australia net debt has nearly tripled as a percentage of GDP.

In Australia, both the global financial crisis and COVID-19 took us from a zero net government debt to our current position. We paid off in the Howard Government net debt, so we were debt free. However, in the last few years, the Australian Government is starting to pay down some debt by running a budget surplus based on higher tax collections.

Whatever the political response is, the basic challenges for our societies have not changed.

The demographic trends of an aging population have not changed.

Apart from the horror of COVID-19, the health and education trends of the past ten years have not changed.

Even the terrible wars in Ukraine and now the Middle East, have had minimal impact on western governments’ spending.

Unquestionably, climate change has made a difference, but from a government budget perspective, it has not been a materially significant issue.

All this and we still have no resolve to live within our means.

Tragically, populism is rampant and clearly uncontrollable.

Following my speech here, I went on to become Treasurer of Australia. In 2014, I delivered a Federal Budget that had an economically modest impact. It offered a medium term reduction in real Government spending.

It had a number of initiatives that were focused on targeted savings and the concept of people with adequate income paying their own way for services.

For example, we proposed a $5 co-payment for a patient visiting their doctor (until then it had been deemed “free”). A safety net was put in for 6 million Australian concession card holders.

Well, the critics claimed it was the end of time. Journalists panned it as unfair, mean and elitist. And even the Australian Medical Association criticised the initiative.

This week, in Australia, that same Australian Medical Association has recommended the standard GP consultation fee go up to over $100 per visit, leaving patients, after the Australian Government rebate, out of pocket for more than $40 a visit. Believe that.

Till this day, critics pan the Budget is still panned as “unpopular”.

It is naïve and absurd to measure the popularity of a Federal Budget. Spending money may be popular but saving money is not. That’s why governments borrow money and spend it. Painless popularity; the necessary evil of short election cycles.

Western democracies have fallen into the deep abyss of populism that makes hard decisions between regular elections almost impossible. I don’t need to remind you here in the UK of that challenge.

For perspective, the National Health Scheme is a signature example. After the British Monarchy, I’m assured it’s the most loved entity in the United Kingdom. In fact, it might even be more loved than the Monarchy. However, it is, from all reports, close to broken.

With a waiting list of 7 million patients and 2.5 million Britons off work each week because they are sick, the goals of the NHS are not being met. Yet each year, even after taking into account the impact of COVID-19, the NHS becomes more and more expensive with poorer outcomes.

Once again, an entirely publicly funded system, with no means testing, does not meet the communities needs and expectations. And yet it is politically toxic to suggest, and I can see this from Australia, it is politically toxic that there should be an affordable means tested co-payment to sustain and improve the service.

Apparently feeling good about a “free” entitlement is more important than the health outcomes.

Once again, the people that lose out the most are those that need the most. Wealthy people can get around the failures of a broken public health system by purchasing private medical treatment.

Governments are scared to change entitlements. They fear losing elections.

Even though I lost my job as Treasurer and Tony Abbott his job as Prime Minister in 2015, the Coalition Government we formed went on to win the next two elections in Australia. Along the way most of the savings of my 2014 Budget, from public sector program cuts to ending business subsidies, were implemented. Crucially, stricter means-testing for welfare was implemented and cost controls on spending were delivered.

Reductions in foreign aid, increases in fuel taxes, the abolition of failed industry programs and changes in the growth of spending in health, education and welfare paid for new expenditure in infrastructure, defence and the creation of an enduring Medical Research Future Fund. We closed open-ended public sector superannuation funds and reduced the size of the public service by more than 15,000.

To critics it was a failure. It was not. It was simply unpopular.

I give credit to my friend Mathias Cormann who, as Finance Minister, subsequently delivered those changes until he retired in 2020. He is now Secretary General of the OECD.

As each year passes the challenges become more significant.

Most governments of western democracies have not only failed to rein in existing entitlement programs …. they have added new initiatives.

For example, in Australia, the National Disability Insurance Scheme was introduced in 2016. It was originally legislated before we were in government back in 2012. Initially intended to be run with $13bn a year, a blowout in costs sees it rising to more than $35bn a year. It’s expected to reach $50bn a year in the next four years thus becoming Australia’s most expensive social program.

Of course, there is little argument against doing all we can to help disabled Australians. It is, and should be, a way to better health and employment outcomes across society. However, it is not adequately funded by new taxes and the gap is turning into a medium term budget nightmare for the Labor Government.

To their credit they are responding to the challenge however the options are limited. Either we borrow from future generations to pay for the funding gap or we apply proper means testing on services with a view to make the safety net sustainable.

There is also, just, a glimmer of hope in Washington DC.

Last year the Democrat controlled Congress passed the Inflation Reduction Act which committed an additional $433 bn in new spending on pharmaceuticals and climate change initiatives. To their credit, the Congress fully funded the spending. And even though I can’t get excited about increased taxes, in the absence of new savings, at least they raised taxes by $739bn to pay for it, thus reducing the deficit by more than $300bn.

Of course, as you know, tax increases are a hand brake on economic growth. As Margaret Thatcher so eloquently stated “any government that has high taxation is giving itself more power and the people less”.

The only alternative to increasing tax is to either postpone the burden by borrowing more money today, or to spend less. Spending less is clearly not happening.

The political irony in the United States is that the fiscal lectures come from the Republicans but the last administration to live within its means was the Clinton Administration. That Congress delivered a $122bn Budget surplus in 2001.

In fact, since that time, consistent Budget deficits have blown out American Government debt by an extraordinary $28 trillion. The Party that voted against the legislation, the Republican Party, has been screaming about the rising debt levels of the US Government but when they were in total control of the White House and the House of Representatives and the Senate, the US deficits grew larger and the US government debt grew bigger.

In 2000 US Government debt was $5 trillion or 33% of GDP. Today it’s a massive $33 trillion which is 121% of GDP.

Why the ballooning debt? Because it’s too hard politically to stop borrowing money.

They all run the political charades of implementing a debt ceiling or closing down the Government because it has run out of money. That’s base political opportunism.

The reality is that with a crucial congressional election every 2 years no one wants to make a hard decision on limiting spending.

You would think that a president, who is required to retire at the end of their second term, may be prepared to do what’s right. However, unlike our Westminster system, the President in the United States has little control over the Budget. It’s mostly in the hands of the legislature.

While the Congress had borrowing costs with 0% interest rates for the last few years – they didn’t hesitate to borrow more money and spend more money. Buy now, pay later not only became a retail form of finance … it has been used by every government.

Its utility facilitated more spending and even paid for tax cuts.

However, the chickens have now come home to roost.

This year the US Budget deficit blew out to an unbelievable $2 trillion. Double the Budget deficit of last year.

To put it in perspective, the US Budget will spend $6.3 trillion this year and nearly one third of that will be paid by debt, the rest by taxes. And that’s in a Budget friendly environment where there is no recession and the US has full employment.

Yet for American taxpayers, the Budget will deteriorate as interest rates rise so too does the cost of government debt to the bottom line.

By 2025, so that’s just two years’ time, the interest alone on US Government debt will cost the Budget more than the entire Defense Budget. By 2026, a year later, the US government will spend more on interest on its debt than it spends on the cost of Medicare.

America is strangling itself with debt.

Perhaps they think they can follow the lead of the United Kingdom from the 1950’s and beyond. Over those three decades the UK just let inflation rip.

It’s hard to believe when you do the research on this – In 1950, debt peaked at a massive 270% of GDP. It dropped to around 50% of GDP by 1978. Why? Because the UK Government kept inflation higher than the interest rates on their debt. So inflation in the form of higher and higher taxes and an inflated economy helped pay down the debt.

That of course is a false economy because as we noted earlier inflation is a back door tax on the community. In short it was the British people that paid a heavy price.

When Margaret Thatcher was elected to office the top tax rate on incomes was 83%. The top tax rate on savings was 98%. And all that time inflation was a further tax on the British people.

It’s not the answer for 2023.

Yet, on top of all this we still have our structural challenges.

Populations across the Western world are aging.

Climate change still represents the greatest threat to our planet’s environmental sustainability for thousands of years. And the global power struggle between populism and good government has resulted in trade tensions and a rise in economic protectionism.

If that is not enough the specter of a wide-scale conflict grows more concerning each day as the familiar old partnership of authoritarianism and nationalism yet again raises its ugly head.

In 2012, my warning to communities was that we had to curb the entitlement culture in order to make our lives sustainable in a complicated world. Nothing has changed.

Today I am warning our legislators and leaders that it is their sense of entitlement that is the problem.

The entitlement to hold on to power. The entitlement to be popular no matter what the cost.

Political leaders are afraid of hard decisions when everything can be bought with borrowed money.

That sense of entitlement, that you can give people everything they want, is a cancer in our community. And we will all pay a price.

So Mark, I really didn’t want this speech to turn into a bad Hollywood sequel.

Apparently, again this is the benefit of Google, the very worst movie sequel of all time was “The Exorcist 2 – The Heretic”.

So let us evict the evil spirits and focus on some things that continue to give us hope.

And nothing is more exciting than the capacity of our fellow human beings to innovate.

Our collective desire to live longer, to be happier and to have a better quality of life drives innovation. That innovation has made a material difference to our society.

With innovation and money, we can respond to the greatest challenges of our times.

And nothing in my lifetime can match what humanity achieved in its medical response to COVID-19.

At that time, I was living in Washington DC, and Operation Warp Speed, the public-private program to rapidly develop a vaccine for COVID-19, was an unprecedented partnership between private innovation, government funding and regulator flexibility. On scale and outreach there was nothing in the world that could match the initiative.

Backed by $18bn of government funding, Operation Warp Speed helped get the world back on its feet and saved millions of lives.

It funded and accelerated vaccines from Johnson & Johnson, Moderna and Novavax. It even funded $1.2bn to the groundbreaking Oxford University AstraZeneca vaccine. And the US provided those funds even though the vaccine, in particular, was never used in the United States.

Even the Pfizer vaccine, which was part funded by the German Government, received billions of dollars from the US Government for production and distribution.

But money alone was not the panacea.

We had the very best researchers and medical specialists all around the world working to accelerate their existing research to find a vaccine to save millions of lives.

And in response to the challenge, nations across the earth from China and Russia to the United States, the United Kingdom and Europe, gave away billions of doses of vaccines to poorer nations. Non-government organisations joined with national and multinational agencies to administer vaccines to the poorest and most inaccessible people on earth.

It wasn’t perfect but, for a brief moment, in the face of a momentous challenge to the entire world community, we all stood tall. We saved our world from it’s greatest modern challenge. In 2023 innovation has no limits.

We often think of how innovation has made goods and services more accessible. For example, how would we have coped without on-line retailers that kept the food and groceries flowing during COVID-19. Social media made information more accessible in time of pandemic, war and climate change.

In 1789, Benjamin Franklin declared that “nothing is certain except death and taxes”.

I agree that taxes are around forever.

However, with new innovations perhaps death is not as enduring.

An esteemed Australian biologist based at Harvard University, Professor David Sinclair, believes that aging is a disease that can be cured.

He and his small team of researchers have worked for years on fixing what he calls the “glitch” of aging.

And they’ve had success. In 2020 Sinclair and his team were able to restore vision to old mice by injecting their eyes with a specially designed virus that reverses the degrading effects of age on its eyesight.

He and his team then took the research a step further, being able to partially turn back the biological clocks in multiple other organs of mice they prematurely aged.

And then earlier this year, they made the significant jump to primates. Using the same therapeutic technique, they were able to significantly improve the visual function in a primate’s eye which had been damaged from a disorder similar to a “stroke of the eye”.

Sinclair and his team believe that eye diseases are just the beginning. He hopes to be able to stall, and even reverse, aging within people by applying the same therapy to other organs that naturally “malfunction” with age.

While this field of scientific inquiry feels as though we are venturing into the realm of fiction, we are on the path to discovering the fountain of youth.

But this discovery is illustrative of a broader economic and demographic trend. We are living longer and healthier lives.

The average Australian lifespan is currently around 83 years old. And we are expected to live closer to 90 by the year 2062 when the number of citizens aged 65 and over will be more than double today.

Many countries in the Western world are experiencing a similar demographic trend.

EU countries have among the highest proportion of over 65s. While in 2012, 18% of population was over 65, 10 years on it’s 21% meaning there are fewer working-age people available to support the economy.

If Dr. Sinclair gets his way, we will begin seeing our 110th or 120th birthdays – or longer still! I suspect that will have run out of presents by that stage.

Unfortunately, this creates an impossible paradox. We cannot simultaneously live longer, expect more, and pay less for it.

Without a recalibration, we will simply saddle our children with debt that will starve them of their futures.

The road back to living within our means is hard. However, the pressures of the modern world and aging populations will require a fundamental reformation of the social contract between governments and its citizenry. A fundamental shift in expectation.

Not only are we on track to spend more and more of future generations’ money, but we’re also planning on sticking around for longer to breathe their oxygen.

Isn’t that the ultimate act of selfishness and, perhaps, the ultimate claim of entitlement?

I’m certainly not advocating that we want to stop the march of human evolution and scientific progress. But we also want to have a modicum of selflessness.

And that means living within our means. By becoming a selfless, rather than selfish, society.

And having the boldness to lead a rediscovery of the language of small government ….. that should be compelling to today’s electorate.

It is unending work bringing to an end to the Age of Entitlement. And we should not be discouraged by setbacks and hurdles.

It will not be a painless journey – I know that from my own personal political experiences over the last decade.  But let me tell you and promise you, it is worth the pain.

We should all strive to give those that follow us – the best shot at life.

I’m personally not sure about David Sinclair’s desire to end aging.

Growing older encourages us to build a life and pass on lessons to our children. Hopefully that leaves the world a better place.

We are at risk of self-destruction if we not only continue to live well beyond our means but also we try to live forever.

So, I for one, would probably not drink from the fountain of youth should I be given the opportunity.

I think it’s the reasonable thing to do.