Osborne: As much fantasy as Milliband when it comes to economic promises

..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.

Government Borrowing on track

It is a small story really in today's world of a collapsing Spain joining u-bend bound Italy, Greece and Portugal. But yesterday the Government did announce that despite the economic downturn this year, it is still on track to meet its deficit reduction targets for 2011/12.

Which is quite some achievement, and in fact has only happened because £4 billion of extra taxes have been unexpectedly collected (pity those taxpayers). However, as always, the really interesting bit is the lack of actual, er, cuts. Indeed the usual suspects of Health, Education and Social Care are being restricted to just 1% growth on last year  - but the overall spending is still going up. The rate of increase is being reduced and taxes are coming in to help change the balance, but we are still some way off seeing any actual reductions.

I suppose we should be grateful for small mercies and with inflation at 5% real-terms cuts are being made, if not nominal. We are though a long-way off actual cuts though - who would have thought it if you just watched the BBC and read the papers?

The really good news though is that timing is everything. As the Eurozone collapses with shambolic new apolitical Governments all the rage, UK Gilts are currently trading ever more cheaply as investors flee an area where there is no fiscal or monetary certainty for one that has a plan and is following it through.

Here is something you won't see me write very often; well done George Osborne.

UK Public Borrowing out of control

At £20 billion a month, the latest public sector borrowing requirement number to be published this week, the UK's finances are officially out of control.

We currently have printing money, low interest rates and Government spending out of control. Never in my life has the year ended on such an abysmal macro note for the UK. 2010 may well end up as difficult as 2009, which is not what many are seemingly thinking with all the talk of a recovery now.

John Smith, the ex-Labour Leader, once berated John Major for borrowing £20 billion in a year (even inflation adjusted this is less than £40 billion in today's money)!

What a shocking set of numbers this is - the overspend per month is equivalent to the entire annual spend of the Department for Transport and Department of Overseas aid combined.

No wonder the Treasury is getting nervous, I would guess the UK can only really sustain a few more months like this before there is a severe run on the gilts market that will force up base rates significantly - and so ensure a double dip recession. The story you hear from Labour, that it is the spending that is keeping us out of a deeper recession, is rapidly becoming the opposite of the truth.