The State Of Our Union

As I suspected I arrived at work today and there is quite a bit of talk going on regarding the election campaign. What does not seem to have penetrated the hard skin of those who only "do" politics when an election looms is the scale of the crisis in the economy, and that is probably fair enough because I don’t think the campaign has really directly addressed these problems or highlighted exactly how severe things are.

So, here is my attempt to set it out in layman’s terms, both why the main parties are being shall we say economical with the truth and to set out where things are, or at least and more accurately how I think things are. My humble aim is to reach beyond my normal readers and offer something that can help people understand some of what is being talked about. I am not generally comfortable on the economics when it comes to the nitty gritty, so I will reference back where I am able, but feel free to put me right in the comments if I have drifted astray.

I believe it was in the 2009 Budget that Labour set out their spending plans for the 2010/11 year and this was not amended in the recent 2010 budget. In it, Labour has basically said that they will spend around about £706bn in this financial year (2010/11). Now, this covers everything from doctors and nurses, through to teachers, maintaining the roads, buying paperclips, servicing our debts and of course, funding MP's expenses.

That number again is:

£ 706,000,000,000

Now, the Conservatives did say quite some time back in 2007 that they will match Labour overall spending totals were they to win the election. This was emulating Labours 1997 pledge to mirror the Tory economic plans, which won favour with the voters and reduced uncertainty in the minds of the voters about changing the regime. The plan in 2007 was to try and take away any accusations from Labour that the Conservatives would “cut services”.  The debate at that time was that Spending was equal to Service, thus a cut in spending would result in a proportional cut in service; this is an argument I would reject, (but you may not.)

That was pretty much how things stood until recently.

However, the Labour government recently announced that they have identified £11bn of annual spending which they could classify, today, as “waste” and they declared that they intend to cut this waste from their 2012-13 spending plans onwards. In return, the Conservatives amended their 2007 pledge stating that they had in fact identified £12bn in “waste” and that if elected they would cut that “12bn waste starting right away; using £6bn of it to tinker with the National Insurance Bands (the “Tax on Jobs”) and cut spending annual spending by £6bn with the rest.

That's:

£ 12,000,000,000 in annual wasteful spending the conservatives will begin to halt in the over the 2010/11 year if elected in a few weeks.

£ 11,000,000,000 that Labour say they know is being wasted or inefficiently used that they want to keep spending until the 2012/13 year, (though we should keep in mind that by 2012 whoever wins the election will have to have at least one spending review before this date so all numbers at that point are likely to change.)

£ 6,000,000,000 that the Conservatives will spend less per year than the Labour Government. (A less than 1% reduction.)

So to repeat, the £6bn currently in discussion in the media and on the TV and what will be mentioned in the leader’s debates is £6bn of money already being spent which has been identified as wasteful with a further £6bn being used to not make employing people into work more expensive.

So, based on the above, the Conservatives are effectively now saying that for 2010/11 their spending projection is the Labour pledge of £706bn, less the £6bn just mentioned, or:

£700,000,000,000

Now, if you like me get a bit bamboozled over these numbers you are not alone and it is because the numbers are truly huge.
 
To pay for Public Sector Spending as set out by each party a Government can basically do two things, it can collects tax and it can borrow money. Borrowed money needs to be repaid at some point along with interest along the way and is obviously a more costly way of keeping the Government running.
 
There is no way I, you or Alistair Darling can be certain of the amount of tax that will be collected in the 2010/11 period, but what we can look at is how much was collected last year and see how much tax is coming in versus how much is needed to go out. Looking at the HMRC numbers for total tax collected in the past year and in recent years there is a very large gap between what can be afforded via tax revenues and via what either a Labour or a Conservative Government is committed to spend. By the chart linked, the Government has collected £397bn in taxation to go towards the amount needed.
 
Let’s keep our numbers simple hope that the tax rises coming will not stifle tax revenue collection and assume that if collection remained flat the money coming in will be:

£ 397,000,000,000

So in our exercise, with a fair assumption on tax income for this year there is a shortfall or to use the Economic term a Budget Deficit in the Labour plan between the amount of money needed to keep the government going and the amount of money coming in via tax of:

£ 309,000,000,000

And it is fair to say that there is a deficit in tax revenues to the Conservative plan of:

£ 303,000,000,000

And that crucially for this next year alone!


This deficit however is not the same as debt.

So when The Chancellor and George Osborne talk about tackling national debt and tackling the deficit these are not the same thing. Sometimes watching debates on TV about the state of the economy I have heard questions asked about our debt and the answer has come about cutting our deficit – this is usually a rouse to lead away from the truth that by all projections our national debt is soaring and will continue to soar no matter who wins the election because the best the parties are offereing is to halve the deficit.

The national debt can be defined quite simply as what the UK owes, and every penny of it needs to be repaid, usually with interest. The current national debt for the UK is about £849bn and as (I hope) you can see from what I have written above, this is rising all the time as the deficit between the money coming into Government and the money going out are vastly different and the deficit needs to be plugged with new loans.

That number again that every taxpayer in this country is now indebted to is:

£ 849,000,000,000

Now, unfortunately this is the "official" number.  However, the official number because it is defined by the Government does not take everthing into account that you and me might include in a more traditional definition.  So, to illustrate this more clearly I need to go back just a few months.  At the end of 2009 the National Debt number stood at £829.7bn.  At that point I wrote about how that £829.7 does not even include Private Finance Initiatives and Pension Obligations that the Government is obliged to pay and at that point a more truer interpretation might put the true debt at £1.35 Trillion, or:

£ 1,350,000,000,000

But, this £1.3 Trillion also does/did not include the potential and worst case outlay based on pledges to buy back mortgage securities. When those are factored in the number rises again to £2 trillion.

Yep, that’s:

£2,000,000,000,000

As the debt goes up in terms of what we can afford to pay so too will the interest rate in which we can borrow future debt, as it becomes more and more risky to lend to us the more we already owe. This is not just true of the UK, but also true of all countries, all households and all businesses. As our deficits continue our total debt rises.

If the deficit is the difference between income and outgoing, and debt is the total that we owe; it is therefore the case that the deficit can be cut, whilst debt continues to rise.

So, you can see that by focusing the debate on the £6bn issue of whether to cut wasteful spending now or later is kind of a false issue which serves to distract from the fact that to actually implement either plan would require loans that are just not realistic in the medium or long term. To meet spending plans as presently set would require loans that would cripple us. If the deficit is growing by about £12bn every month, perhaps £6bn annual reversal is not enough of a plan for now(?)

When the Chancellor and George Osborne talk about halving the deficit in the next Parliament we should remain aware that they are not talking about cutting the debt that is being accrued for which we must continue to pay interest on, the gap will remain and the amount we owe and the amounts we pay each year in interest are set to go up and up and up and up and up and up.

You can look back across recent years and see, there is no way tax revenue would ever cover the levels needed. Simply raising tax rates will not guarantee that more money will come in at the end of the day.

So, in my humble view the current economic debate is something of a sham, because none of the parties are facing up to the real tough questions that should be posed this side of an election. They all know that there is absolutely no way we can afford to take on and service that level of debt. The extent, size, reach and cost of the State has been inflated to a dangerous size, one in which the people of the UK could never have afforded to support over a great period of time. This has been done by our present Labour Government and it is being propped up already by high amounts of borrowing. We will spend more this year on debt repayments than we will for the entire Armed Forces on the United Kingdom and the figure is creeping up.

Labour has had 13 years to re-build the country in the Social Democratic or Socialist model it so desired, but they built their house on foundations of sand and there is a storm approaching. It will need to be rebuilt all over again.

The State framework that Labour built is going to crumble in the next year or so no matter who wins this election. There is going to have to be massive, massive cuts to get by. But let’s be clear, the size and cost of this predicament has been caused by, set up by, with sole responsibility belonging to, this Labour government.

Please frame this in the context of your home or in terms of circumstances that are close to you in terms of what we must do. If your household income fell, you would not increase your level of spending you would cut it to match your income. There may be loans, credit cards and even a mortgage to factor in, but you would manage these based on your ability to make repayments. We probably all know someone who over borrowed or maxed out their credit cards a few years back who is struggling today. It is not really so dissimilar, we all know that in the end to balance ANY budget spending and outgoings need to be balanced against ability to pay, furthermore we all know that by delaying this ends up being more costly in the long run.

By keeping the argument about the circumstances, and merits of the Conservative application of a potential £6bn distracts from the very real arguments that are not being aired, and that people will be afraid to air. The cost, and thus the size of Government needs to be cut by my guess at least by a third and maybe more.

The Institute for Economic Affairs is more optimistic than me, and they think that without any new tax rises that Labour’s spending plans need to be scaled back by at least £167bn annually.

Sorry, but to continue the theme that’s a cut of:

£ 167,000,000,000

Taking £167bn or two times the NHS budget out of the public sector will lead to unrest, it will lead to strikes. Tragic though the consequences are for the people losing those jobs are, the truth is many of them should not have been hired in the first place, their fate is a result of Government mismanagement of our economy.

So when the layoffs do happen and the strikes and civil unrest does come, be it under Labour, the Conservatives or under a Coalition partnership we should be talking today about what lies in store in the road ahead; because ultimately every single person in our land is going to feel the effect of this, every single one of us. And that is what the leaders in this election campaign should be addressing, and as a result that is the debate that we should be having in our schools, workplaces and pubs. By not discussing the size and extent of the inevitable cuts, I believe will fuel even more unrest and protest, because yet again decisions will be made in Whitehall and by the time the election is over and the cuts are being made, the dialogue will be about the tough decisions that need to be made.

After this election the only thing we will be talking about is cuts, cuts and more cuts. That is why we should all be talking about it this side of the election if we want an input on how those cuts may land.

Inflation Numbers

This week the Governor of the Bank of England had to write to the Chancellor as Inflation surpassed the 2.0% target. The actual Inflation number given was 3.5% however this is the CPI (Consumer Price Index) number, which is the index that does not take into account the cost of housing. The CPI number thus does not take into account what most of us would consider our most important and usually highest outgoing each month. The CPI measurement is the measure set by Gordon Brown when he became Chancellor for use when setting monetary policy.

The RPI (Retail Price Index) number does take into account housing, and is still used for the setting of benefits levels, public sector pay and index-linked government debt. This number was actually 3.7% and so is higher than the CPI number and is generally more reliable for us non-economists in measuring inflation against our changes in cost of living.

The banks however are a little more sophisticated and use their own measure or RPI which excludes interest charges (RPIX). RPI alone can distort because it reflects swings in mortgage rates, and at the moment rates are being kept low by the Bank of England. The RPIX number currently stands at 4.6%, and you won't need a calculator to see that is a full 1.1% above the official CPI number.

Inflation going up was the expected side effect of the recent Quantitative Easing programme, the fear was always that Inflation may reach a level that becomes difficult to control. I speak to the effect to us people on the street as we will feel this in increased prices in the shops and in our bills. The problem is that Labour and quite likely the Conservatives are making noises about a 20% VAT rate after the General Election. This of course relates to you and me as an additional rise of the price in the shops.

To me, I think the way forward is to help people hold on to more of their hard earned money, typically this will be used to either pay down personal debt or passed on in the form of spending. Both of these actions are good, personal debt is worryingly high and consumer spending is very low and this is fuelling this slowdown. With Interest Rates low, there may not be the inclination to put the money in the bank which at this time would not really help too much. However, the danger I see is if inflation takes hold, the Bank of England may see the need to start raising interest rates, which will in turn raise the cost of variable mortgages and make borrowing tougher which in turn will leave many people with less money and in turn stifle consumer spending which is already in the doldrums.

The Governments car scrappage scheme seems to not be a greatly inspired economic scheme. Yes, there were some tax payments, but there was also a large subsidy. However, the bulk of the cash spent on the cars then made it's way off shore back to the car producing nations that have exported to us. No wonder France and Germany came out of recession months before we did. What we also need, as I repeat over and over again is to export as much as possible to places like China where they are sitting on Billions of Dollars. Bring cash into the country, and let it circulate a bit to stimulate spending. When people are spending shops and domestic manufacturers start hiring.

With my usual caution about the lack of my economic credentials I submit this as my working theory as to why we should cut taxes now to reap as much of a benefit from the QE programme as possible.

Help Needed

I have confessed before that my grasp of economics is not the sharpest, though I do feel I understand as much as the next lay person.

I am struggling to understand why the Bank of England has today announced a further cut in the base rate from 1.5% to 1%.

I understand that rate cuts are some times used as a tool to combat inflation, but there are large areas of the economy where prices are coming down, rather than up. I have not seen a report in the press that shows that Inflation is the greatest concern here.

A further rate cut can only punish savers whose rates will be cut instantly. Yet previous rate cuts have not been passed along in full to borrowers, this one probably will not be passed on in full either. The Bank of England, possibly at the Governments urging seems to be drastically trying to help those who have borrowed more than they can afford to repay; but it is doing so at the cost of the people who have been responsible and saved, many of whom have spent their lives paying off mortgages and are now trying to put money aside for themselves.

I am not suggesting that borrowers should not be helped, they should. But, isn't there a danger in helping too generously, those who have borrowed too much, some (by no means all) of whom have been reckless in the levels of debt they have undertaken. Where is the incentive for foreign investors and corporations to bring their cash to the UK? Why should thousands of ex-pats, living cheaply abroad in places like Spain leave their money in UK PLC when they can earn more interest on those savings abroad?

The line I am hearing is that the Government wants the banks lending to each other again. This seems a little dangerous to me, as that lending is based on the UK banks borrowing more. Surely, they banks need to be able to offer incentives for people to put their money in their banks or building societies and use that cash on providing loans at a higher interest than they are paying the saver. Why would a saver want to put their capital in the bank with such unattractive rates?

Anyway, like I say, economics are not my strong point, so feel free to point out if and where I am wrong... but if you do, please use language I can understand.

Economic Stimuli

The BoE has cut interest rates again by 0.5% to a base rate of 1.5%. Now I may be showing some economic ignorance here, but isn't this below where the ideal rate should be? It was a good move to start cutting the interest rates last year, in fact to my mind the cuts started a little late.

However, what benefit does the person on the street get from rates much below 3%? Not much unless you are on variable mortgages or rare products that track below 3%. Just the other day, the Tories announced a tax break for basic-rate savers this was well received, so why are we punishing savers with rates that are too low? The banks are now passing the rate cuts onto borrowers, not even the ones owned by the Government!

Sudden excesses in the printing money are like Guido says, Mugabinomics, and as such is the litmus test for any Governments level of desperation.

What do I think?

All of the world money is spinning around in Asia, we need to get some of it back over here. To do this we need to offer to the good people in Asia products and services that they want to purchase at competitive prices. Plans to stimulate the British Economy should focus on how we can grow our trade and presence in the emerging markets in the world. We should be looking to help British Companies that have the potential to do well in Asia help with grants and tax breaks. Why haven't we done this already? Probably because the UK no longer has any real ability to make trade decisions in the wider world, as this is a function of the European Commission. Could it possibly be that in times of economic depression the National Governments of the EU no longer have the executive means and independance in which to implement necessary changes to domestic economic policies?

So, why not just address this issue instead of sending the printing presses into overdrive and punishing those people that showed the wisdom to save instead of borrowing excessively? Probably so Mr Brown can tell the world that this way is better than being a “Do-Nothing Tory”.