..but of a different kind. It is the most extreme sort of wishful thinking to think the UK is going to balance its budget in the next Parliament, a promise which cannot be delivered upon. Worse is the pure deception that this implies, that somehow when we do this things will improve. Here are 2 charts from the ONS:
What do these tell us? Well thei first one shows how the Public Sector Net Borrowing has changed since 1995. As we can see since the financial crisis in 2008 it has shot up massively. Worse, it is proving to be very stubborn to get down, due in the main due to a lack of will to introduce any drastic cuts or to keep taxes high or raise them further. Or to generate any growth until very recently, of course.
Then the second graph show the total debt and its growth, which is apporaching parabolic. The effect of compound interest is huge as is the garganutan nature of the speed of increase. each month £9 or £10 billion is added to the total bill, costing another £25 million in interest per annum, just to sit still. All this in a low interest environment where gilts are still trading at below 3%. A return to more normal economic conditions, or another euro crisis, could see gilts move up 25% or even 50%. This in an of itself would add something like £20 billion to the PSBR per annum. Drastic cuts would be needed just to stand still.
Also of course, with PSBR this year at £100 billion its hard to see how this gets to zero in say five or six year, especially when the rate of decline has been about £10 billion a year during the Tory 'cuts.' Economic growth and tax receipt increases should help a lot, but still, its not realistically going to come close. Meanwhile total debt is going to arrive at north of 100% of GDP during the next Parliament whoever is in charge; leaving the interest rate time bomb lurking for any incumbent.
The most likely outcome of the election is currently a small Labour majority Government. When the economy enters its post-election downturn, mild, but likely when you look back and see we normally have downturn every 7 years of some sort, the maths will be too hard to beat. Being Labour, they will eschew cuts to NHS, Welfare or Pensions, as even the perhaps Tories would. So instead its going to be really massive tax hikes for the middle and upper income segments or begging to the IMF. Red Ed really will bring back the 1970's. I wonder if George Osborne will be opposition leader then? Somehow I doubt it.
Agreed. It was a clever speech, though. Os has set out his stall in a huge way. He is pitching for the dry vote: no tax rises, running a surplus. He can achieve that only with big cuts even under benign growth conditions.
ReplyDeleteHe is setting a trap for both Balls and Cameron at the same time. Possibly even Farage.
When Os sets out his post-2015 spending plans, as Ken Clarke did in 1997, will Balls promise to stick to them or come across as reckless? Will Cameron undermine George or is this a good cop, bad cop routine?
BE - let's hope its a 1997 moment and Labour commits. then the crash can happen with less harm done.
ReplyDeleteAt least if the tories win they will know what to do when the crash comes.
The next crash will annihilate one of the major partis - like it has in much of southern europe.
the tories for being evil and incompetent or Labour for being proved incompetent twice in a row.
the next election really is one to lose!!
I love what you have just said right there, that the next election is one to lose! I couldn't agree more. It's quite an intriguing game, its almost as if they seem quite oblivious to the figures and what stands before them. Blue Eyes you took the words right out of my mouth, big budget cuts are probably the only way
ReplyDeleteBen
Osbourne to my eye is enormously overrated, childish in petty politiking and seems a bit dim. This latest slice of pie in the sky does nothing to dispel that. A wish list to the faithful with no bearing in reality. He remains a corportist as do the Tories as whole; dressing up in clothes with hints of free markets and individual freedom occasionally like a weekend fetishist pretend playing.
ReplyDeletewell I've said it before ...
ReplyDeletethere's never an election that is 'one to lose' !
politics isn't an evening at the ball - I think I'll sit this one out - or a season on the stock markets (sell in May and go away): it's about Power
keep hands on the levers of power ! (assuming you know how to use them...)
I'll take that bet Nick!
ReplyDeleteND - Indeed its is all about power, which suggests that you want your hands on the levers of power all the time.
ReplyDeleteHowever given the current mechanism we have for rotating the monkeys controlling the levers a big bust (if of course you dont beleive we have returned to business as normal) will wipe you out electorally for a cycle. So I would go with CU's view.
ND agree!
ReplyDeleteHouvis, how do we really know what individual members of a cabinet think privately? We can speculate for sure, but the Chancellor does not have the same freedom as, say, Boris to rubbish individual policies. Plus in the first bit of the coalition ministers have to remain even more on message than during a single-party government for fear of giving something away to the other coalition party.
Now the parties have more scope to say what they would do if elected again, which means they can be a bit more creative.
Cameron certainly seems to be quite happy with big-state Toryism. Osborne seems to be a lot smaller state. Interesting stuff!
30% of national debt is now held by BofE which isn't charging any interest. With QE you are guaranteed to avoid a gilts crisis.
ReplyDeleteGiven that the UK economy seems to have turned a corner we can expect high growth. That will take a lot of people out of welfare and add massively to the tax take.
"In the next parliament" means "within the next 7 years". Quite achievable with moderate growth, public sector cuts via high wastage and inflation running at a relatively high level.
Interesing Ryan, I've not seen the BoE not taking interest and cant find anything on google I'd like to read further do you have a link?
ReplyDeleteHouvis, the Bank gives its "profits" of QE direct to the Treasury. It's very circular!
ReplyDeleteRyan, I reckon Osborne's assumption must be that welfare spending will fall quite significantly and that tax revenue will rise (without raising tax rates) as the recovery gains pace.
Monetarists like me will be watching this quite closely because if Os does managed to squeeze the deficit to zero/negative territory Bank rate could stay low for quite s while. Os has stated in the past he is a fiscal conservative and a monetary activist.
I think Ryan possibly meant that one arm of the govt pays interest to another arm of the govt and so the net result = 0?
ReplyDeleteWhile ND is correct it does seem likely that If Major had lost the 1992 the ERM would have fallen on Labour's watch.
ReplyDeletePresumably Osborne thinks he's being clever. But for the rest of us it looks like further evidence (as if any were needed!) that he's way out of his depth.
ReplyDeleteI'm sure tax rises will come, but the fact is that whoever is in charge, the tax taken has never risen above about 38% of GDP. Cuts to pensions it'll have to be.
Agreed, we thought Labour were bad in terms of deficits, but the current lot are worse.
ReplyDeleteClearly, if Labour get back in, they'll be even worse than the current lot, I'm not taking sides here.
Problem is, little George has cleverly tapped into the myth that the largest area of "waste" is working age welfare spending, which is the least of our problems. If he thinks he can fix the deficit by obsessing about the four or five per cent of govt spending which goes on dole money without causing a revolution, he has got another think coming.
The other myth is that we can fix the deficit by screwing back on (admittedly over generous) public sector salaries.
Fact is, 40% of govt spending is subsidies to corporates, banks, quangoes and landowners. You can look it up for yourself at HM Treasury.
Ryan - those gilts will be a big loss if interest rates rise, as the price collapses, the government balance sheet will look atrocious. The only way out is more QE; but when to we get to the point where people realise we are just printing money and it is no longer real.
ReplyDeleteAs someone who currently has the government as a customer, I can assure everyone that its level of waste and incompetence is beyond even my previous jaundiced views.
ReplyDeleteEvery pound spent by the government removes a chunk of that pound out of the economy and wastes it. The money does not of course disappear, but the economy is misdirected. Wealth is squandered. Osborne has simply not tackled this problem.
"The only way out is more QE; but when to we get to the point where people realise we are just printing money and it is no longer real."
ReplyDeleteWe aren't really printing money at all. You are mistaking the German 1930s case with what the bank is doing now. It is [1] monetising debt (i.e. converting money in the form of debt to money in the form of cash - this makes very little difference to the man in the street & [2] the debt is still held by the BofE and has to be repaid - the BofE has made it clear it has no intention of writing it off.
Introduce a Land Valuation Tax, reduce PAYE.
ReplyDeleteIt'll hurt - granted - but its the only way to rebalance the economy.
You know its coming and you know it makes sense.
Embrace it and lets get this farcical pantomime behind us and a real economy going to serve us once more.
Very interesting article. I would love to read the book “Start with Why”, by Simon Sinek. I think he has taken a great topic to deal with. Teaching leaders to inspire others is a good idea to bring up a civilized society. Thanks for sharing. Keep posting.
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