Tuesday, 8 May 2012

Can you do a better job than George Osborne?

Peter Jordan issues a challenge to PGS pupils

Tough choices for the Chancellor
(image source: blogs.hillandknowlton.com)

Almost without exception the economic powerhouses of the 20th century are up to their necks in debt. In the UK the situation is particularly severe. If you add up all the debt owed by individuals, companies, financial institutions and the Government the total comes to about 5 times annual earnings. This is quite a large amount of money when you consider that borrowing more than 3 times earnings to buy a house is almost impossible these days and would be considered by most to be financially reckless.

Although there seems to be general acceptance that we have a problem, there doesn’t appear to be much enthusiasm for doing anything about it. Although George Osborne and the Coalition have made some attempt to address this situation, the media and its agents are hardly helping matters.

Reductions in bloated public sector budgets, rationalisation of public and state pensions, reduced welfare benefits, increased taxes on sausage rolls, reduced tax breaks for pensioners and the super rich – you name it and any attempt to reduce the deficit is attacked. Against this background there seem to be innumerable good causes making their case for more Government money or less taxation.

Given the noise that has been generated, you could be excused for thinking that these measures were so significant that they would make a big dent in our debts. However, the projection for this year is that despite these “savage” cuts, the Government will spend (£683bn) 15% more than they receive in tax revenue (£592bn) over the next 12 months. This means that the amount of money the Government owes is still increasing.

During the current fiscal year (2012/13) the Government estimates it will borrow a further £120bn (this is bigger than the difference between taxes and spending as it includes money borrowed to fund long-term capital projects). This is enough money to create 120,000 millionaires.

The reason the Government has to use the phrase “Deficit Reduction Plan” and not “Debt Reduction Plan” is that as all they have committed to is a plan that stops the total debt rising as quickly by reducing the amount the debt increases by (the deficit) each year. Superb spinning - more difficult to unpick than one of Muralitharan's doosras. Most people have failed to do this and believe that the level of debt is actually reducing.

However the spin doesn’t stop there as the Budget statement included some fancy charts that show the total amount of money owed is reducing. This is another slick move as the charts they use show how much money is owed as a proportion of the UK’s total income (GDP). This shows the figure rising before ultimately flattening out in 2015/16.  

However, this method of presentation is potentially misleading as the Office for Budget Responsibility (they make independent economic forecasts and projections of the Government) have made the optimistic assumption that the UK economy will suddenly start growing so that total national income (GDP) will increase by 12% from 2012 to 2016.

This has two implications: the numerator (total debt) will be lower because more national income (GDP) means more tax revenue and less expenditure (fewer people out of work and in receipt of benefits) and as national income (assumed to increase) is actually the denominator in the calculation, then the outcome is far better than it would have been had a more conservative rate of growth been assumed.

If the assumed growth isn’t achieved (there is no compelling evidence currently that we will do anything more than simply stand still) then things will rapidly deteriorate and we will have some stark choices. Borrow even more money to maintain government spending or increase taxes and/or reduce government spending to make up for not achieving the rates of growth assumed.

As borrowing more carries the risk interest rates rise, none of these options are attractive. I suspect this is why representatives of all political parties would rather argue about more important matters such as sausage rolls, jerry cans in garages or the Murdochs.  All of this suggests that the best idea they have is to just carry on hoping that the UK economy will suddenly start growing again.

So my challenge to the sharp minds that read Portsmouth Point is what would you do if you were in charge - spend less (on what), tax more (what) or borrow more?

1 comment:

  1. I COULD!!! PICK ME!! PICK ME!!!!


Comments with names are more likely to be published.