The UK government debt continues to rise rapidly, despite claims to the contrary. This month alone another £12 billion was added, taking the total to over £1.5 trillion for the first time. Currently interest payments are £43 billion a year at very low interest rates. The danger is that these interest rates will go up, making it virtually impossible to avoid a complete economic meltdown, although the UK can be described as insolvent already, because the government finances, as they now stand, are incapable of paying off this national debt, let alone future increases in interest payments.
If the interest rate returned to its normal average of 5% it would cripple public finances. That is why the US and UK have maintained very low interest rates, because they cannot afford to let them rise.
At £43 billion in annual interest, the government is paying out 8% of UK tax income. Every week that goes by, the deficit is increasing by about £2 billion. To finance this interest alone, every single household has to pay nearly £2000 a year in taxes.
The idea that this government debt is just a government problem, is clearly ridiculous on the basis of these figures. If interest rates increase, then it is going to hit everyone in the wallet big time. The amazing thing is that when Tony Blair was Prime Minister, he ran a budget surplus for a short period, because Chancellor Gordon Brown ran a tight ship; that was until he let rip especially towards the end of Blair's government. The Tories under David Cameron have also spent like there is no tomorrow and since the election in 2010, government debt has mushroomed from 900 billion to 1500 billion; about 10 billion loaded on per month. This is in spite of massive cuts in government expenditure.
The deficit has clearly run out of control and the Tories, despite all their rhetoric, simply have no miracle cure for reducing it. Either they are going to have to increase taxes or massively reduce spending, way beyond what they had already proposed. Otherwise, we are all going to have to fund this deficit and I have suggested, in my companion blog 'Some simple sums', one way we might all voluntarily achieve this to avoid impending financial disaster.
There is some good news. Only 35% of the lenders on our debt are foreign, so we are a lot less dependent on creditors from abroad than Greece and other countries and we have a good track record of always paying our debts. Having said this, none of us should be under any illusions and we should not allow this borrowing to increase any more, because if we do, it is only the most vulnerable and ill people in our society who will suffer. We should all demand that the government absolutely places a limit on the total government debt. This should be set at !600 billion, which is already way above what we can afford, but at least preventing it spiralling out of control as in Greece and Argentina. In Greece, interest rates on the government debt of 323 billion rose from 6% in 2014 to 10% in 2015. Currently, they have to find 32 billion a year on interest payments,which is about 35% of all the revenue they are taking in, making it virtually impossible for them to keep up with interest payments, let alone the total debt. Worse still, their interest rates may rise even more if they do not keep up with payments. It is not difficult to see, that unless the UK government sets a limit on the total debt, the same problem could occur.
So is it feasible that the government could achieve a budget surplus by 2020, as they claim, when they would have allowed the total debt to increase to over 1600 billion (or 1.6 trillion) ? The short answer is probably not. With this months unexpected increase of a 12 billion deficit, these government projections are beginning to look flimsy. They originally projected a total debt of 1532 billion by March 2016, but already in August it stands at 1506 billion. As it has already risen by 12 billion in one month, even if that was preceded by a small surplus through lots of tax receipts in the previous month, it would only take another disastrous month like that in the next 7 months for their projection to be exceeded. Naturally, the government is selling off assets as fast as possible, but those sales may only delay the inevitable for about a year and those assets cannot be sold twice. The one off sale of bank holdings, may or may not raise 60 billion, but set against the interest payments of £43 billion a year, let alone the annual shortfall in the budget, its not going to last very long.
In any case, even if the government managed to achieve a budget surplus by 2020, could they maintain it ? The total debt would still be over 1500 billion with its yearly interest loaded on. Clearly, once these asset sales have faded and North Sea oil revenues have diminished as the oil price stays low, then the yearly battle to prevent catastrophe would continue. If the interest rates then went up or a war or other emergency occurred, then the UK would end up like a basket case, with Greece for precedent. Now that the Volkswagen scandal has severely hit the German economy, the global problems are piling up, let alone the growing cost of the refugee crisis which has caused the United Nations to run out of funds to feed the Syrian refugees.
Meanwhile, over the Atlantic, God save America from its burgeoning debt, now set at $18 trillion or about £12 trillion. It now exceeds their GDP of about £11 trillion pounds and the annual interest of $200 billion a year. If interest rates rise there, then this figure could rise to $800 billion meaning that 20% of their GDP would be paying interest. If that sounds reminiscent of the Greek 35% of GDP, well it is and is America to big to fall ? I don't think so !
Wednesday, 23 September 2015
Tuesday, 22 September 2015
Some simple sums
In July 2015, the government proudly announced that they had their first budget surplus due to some impressive tax receipts. The only problem was, that all of their projections for government borrowing have been thrown out by the 12.1 billion deficit in August, as those tax receipts dried up.
The sad reality is, that if one consults the Public Spending 2016 PIE Chart Tables
given on www.ukpublicspending.co.uk, one discovers an incredible amount of wishful thinking, which goes to prove that if you wish to prove something with partial statistics, you can do it. Two clear discrepancies stand out. Firstly, the GDP figures proudly display an increase from 1732 billion in 2014 to 1807 billion in 2015 and projects further increases on a very shaky basis, up to 2021 billion in 2018. There is however one big problem with these figures, which is this. If the budget deficit in this same year, 2014-15 was about 90 billion, it strikes me that it practically cancels out this increase in GDP of 75 billion ! Worse still, if one studies GDP per capita, that is per head of population taking our large recent population surge into account, then 2015 has still some way to go, to get back to the peak in the financial crash of 2007-8 when government spending to rescue the banks went through the roof. Over the last two years, the UK population went up one million to the present figure of 64.5 million. No wonder people complain they feel no better off, although oil prices coming down has clearly helped somewhat.
Secondly, the projection for Public Debt, could well be living in la la land. In 2014 the debt was 1402 billion and by April 2015 1479 billion, an increase of 77 billion. To put this into perspective, total government spending is 760 billion a year, so one tenth of the budget is borrowed money. The projection made is that this public debt will only increase to 1532 billion by April 2016, that is 53 billion. However, this has been thwarted by the fact that in August it had already increased to 1506 billion and so the projection may have to be revised back up to 75 billion for the year. The problem then comes, that if GDP does not increase accordingly, then tax receipts will tail off and we then see the deficit rising more rapidly. The main reason for this, is that factory orders are falling as the world economy slows and Britain being so dependent on foreign trade, this is throwing current projections out of the window.
Furthermore, these projections are based on the assumption that interest rates will not rise. Actually, domestic interest rates may not rise, but supposing foreign investors began to get concerned about our ballooning government debt and decided that we were a bit risky, so that they would only lend to the UK if interest rates were raised ? If interest rates went up to a more normal 5%, then every year the interest paid on 1500 billion would be, surprise, surprise, our familiar figure of 75 billion again. If that had happened this year, for instance, then government borrowing would go through the roof. If you add 75 billion in interest to 75 billion current yearly shortfall, then the shortfall would double to 150 billion per year. This is despite the fact, that Chancellor George Osborne has cut many services to the bone.
We may not be bankrupt yet, but the government is certainly running an insolvent economy and only getting away with it because of zero interest rates. Even more farcical, is that the Tories claimed it was Labour who mishandled the economy and the voters fell for it. The hilarious thing about all this was that Ed Balls never focused on this Tory shambles of allowing the public debt to rise 600 billion in 6 years, which would have been obvious to some of the more economically competent politicians of the past. Yes, Labour did increase this debt to 900 billion, but that was partly to bail out the banks in 2008. The incredible thing is, that the Tories have been selling some of these bank assets and making huge cuts and yet still raised the public debt by 100 billion per year and then expected everyone to believe that the economy is growing apace.
Worse still, we have the most inept economists ever, claiming that government borrowing is a good thing for the economy ! What utter rubbish; how can the present out of control borrowing be considered healthy for any economy ?
The government is claiming that it will eradicate the annual spending shortfall by 2020 or soon after. As this assumes a normal world growing economy and zero interest rates, we can see how precarious these projections are. The fact is that global debt since 2007 has increased by about 38 trillion pounds. A trillion is equal to 1000 billion. Of that figure, the UK accounts for just over half a trillion pounds and the US for just under 6 trillion pounds. One hears that countries can't go bankrupt, but Greece is certainly insolvent and accounts for a further one third of a trillion, which will probably never be repaid to French and German banks who are therefore insolvent in turn. One can see where this is leading; even China has increased its debt to 235 % of its GDP, while the world debt is now a staggering 286 % of world GDP. Chinese growth rates are stagnating as they are struggling to sell their goods and are overproducing like mad, making their situation even worse and proving that control of economic free markets does not work. As economies shrink, they attempt to borrow more as their GDP and productivity become sluggish.
This is the final roll call for global capitalism it would seem, but only a few analysts are prepared to take the consequences of this fully on board. The very concept that economies would just grow and grow has now been disproved, because anyone can grow an economy if they borrow a large enough sum before they have to pay it back.
So before we hit another global crash which may well be the mother of all economic crashes, is there anything we can do ?
Actually there is and if one thinks about it, we have to consider the best interests of a younger generation who are going to inherit the nightmare scenario of a run away debt train and a shrinking economy. Here are some simplified UK figures :
Trillion pounds
Total government debt 1.5
Total mortgage debt 1.2
Total consumer debt 0.2
Total housing asset value 6.8
Total savings 3.5
Total GDP 1.8
Total government spending 0.8
Total pension funds 2.1
If interest rates increase, the mortgage debt would also increase as well as consumer debt. Every adult in the UK has an average credit card debt of 3414 pounds in July 2015 and an average mortgage debt of 25142, which means that annual interest payments are 1050, or 4.1 % of average earnings. The hope that consumer borrowing could keep on safely rising to grow our economy is based on wishful thinking, because if interest rates rose to 5%, it would vastly increase all these borrowings.
Housing asset value, like industrial asset values, is very large but subject to falls as well as rises. At the moment, the large increase in house prices in 2014 of 11% has more or less halved and is likely to decrease further. Of course, estate agents try to tell you that they will increase, but the fact is that first time buyers are not entering the market because house prices are so high and do not reflect incomes and the ability to afford mortgages. In any case, this is not free cash; it is tied up in bricks and mortar, so of itself it cannot solve this problem because people live in their homes and thus, they rarely become sold without needing to purchase another house.
So effectively, the main financial recourse available to free us of this public debt lies in the savings and pension funds.
When a government like Greece and Argentina becomes insolvent, it then raids people's savings or taxes them to the hilt. This is extremely likely to happen again, even here in Britain. It would simply be a repeat of what happened when many English kings overspent, like King John; they just raised taxes.
To forestall this, what I propose is this. Any savers in the UK are already seeing there savings stagnate or shrink with low interest rates. If we all collectively volunteered to donate funds to the public purse in order to pay off much of this debt, then this would give any future government the chance to balance the books, instead of paying out ridiculous sums in interest.
In return, the government would have to guarantee that it did not raise borrowing again, unless there was an emergency like a world war. Instead of having to worry that international lenders could effectively raise our interest rates and cripple our economy, the debt would be owed to UK citizens. Over a period of 5 or 10 years, the government would seek to reimburse part or all of these savings but it would be impractical to project precisely how long this would take if the world economy continues to slide. Individual savers who had need of a more immediate return of funds could be catered for, but as most savers are in it for the long term, it appears to be in everyone's interest to take the long view of this situation, as we were forced to do during the Second World War. There would therefore be a withdrawal of funds from banks and building societies, which might affect them to their detriment, but it would certainly be preferable to a run on a bank, as we saw with Northern Rock where all the savers lost out.
It is clearly in no ones interest if government debt does spiral out of control, least of all those vulnerable members of our society who are already suffering from the cuts. I personally, would be more than willing to donate to the public purse between 10 and 25% of my savings, which are earning no interest at the moment in any case, for the good of those who we are hoping will work to keep us in our old age.Of course, this would be a useless gesture if no one else agrees. If everyone who had savings voluntarily agreed to similar sums then this would set the public finances back in order. It might not totally remove public debt but it would mean that we were not in danger of being called up by international lenders and crippled by high interest rates. Anyone who had no savings, but had a house or other assets that they wished to lend some percentage of, could also contribute to this fund. It would certainly be preferable to the government having to tax people out of existence to pay the looming huge interest rates.
So if the kaka doesn't hit the proverbial fan, with unemployment now on the rise and the average family on Tax Credits to be 1500 pounds a year worse off next year, will there be still something for young people to look forward to as we did in our younger years ?
I certainly hope so.........
The sad reality is, that if one consults the Public Spending 2016 PIE Chart Tables
given on www.ukpublicspending.co.uk, one discovers an incredible amount of wishful thinking, which goes to prove that if you wish to prove something with partial statistics, you can do it. Two clear discrepancies stand out. Firstly, the GDP figures proudly display an increase from 1732 billion in 2014 to 1807 billion in 2015 and projects further increases on a very shaky basis, up to 2021 billion in 2018. There is however one big problem with these figures, which is this. If the budget deficit in this same year, 2014-15 was about 90 billion, it strikes me that it practically cancels out this increase in GDP of 75 billion ! Worse still, if one studies GDP per capita, that is per head of population taking our large recent population surge into account, then 2015 has still some way to go, to get back to the peak in the financial crash of 2007-8 when government spending to rescue the banks went through the roof. Over the last two years, the UK population went up one million to the present figure of 64.5 million. No wonder people complain they feel no better off, although oil prices coming down has clearly helped somewhat.
Secondly, the projection for Public Debt, could well be living in la la land. In 2014 the debt was 1402 billion and by April 2015 1479 billion, an increase of 77 billion. To put this into perspective, total government spending is 760 billion a year, so one tenth of the budget is borrowed money. The projection made is that this public debt will only increase to 1532 billion by April 2016, that is 53 billion. However, this has been thwarted by the fact that in August it had already increased to 1506 billion and so the projection may have to be revised back up to 75 billion for the year. The problem then comes, that if GDP does not increase accordingly, then tax receipts will tail off and we then see the deficit rising more rapidly. The main reason for this, is that factory orders are falling as the world economy slows and Britain being so dependent on foreign trade, this is throwing current projections out of the window.
Furthermore, these projections are based on the assumption that interest rates will not rise. Actually, domestic interest rates may not rise, but supposing foreign investors began to get concerned about our ballooning government debt and decided that we were a bit risky, so that they would only lend to the UK if interest rates were raised ? If interest rates went up to a more normal 5%, then every year the interest paid on 1500 billion would be, surprise, surprise, our familiar figure of 75 billion again. If that had happened this year, for instance, then government borrowing would go through the roof. If you add 75 billion in interest to 75 billion current yearly shortfall, then the shortfall would double to 150 billion per year. This is despite the fact, that Chancellor George Osborne has cut many services to the bone.
We may not be bankrupt yet, but the government is certainly running an insolvent economy and only getting away with it because of zero interest rates. Even more farcical, is that the Tories claimed it was Labour who mishandled the economy and the voters fell for it. The hilarious thing about all this was that Ed Balls never focused on this Tory shambles of allowing the public debt to rise 600 billion in 6 years, which would have been obvious to some of the more economically competent politicians of the past. Yes, Labour did increase this debt to 900 billion, but that was partly to bail out the banks in 2008. The incredible thing is, that the Tories have been selling some of these bank assets and making huge cuts and yet still raised the public debt by 100 billion per year and then expected everyone to believe that the economy is growing apace.
Worse still, we have the most inept economists ever, claiming that government borrowing is a good thing for the economy ! What utter rubbish; how can the present out of control borrowing be considered healthy for any economy ?
The government is claiming that it will eradicate the annual spending shortfall by 2020 or soon after. As this assumes a normal world growing economy and zero interest rates, we can see how precarious these projections are. The fact is that global debt since 2007 has increased by about 38 trillion pounds. A trillion is equal to 1000 billion. Of that figure, the UK accounts for just over half a trillion pounds and the US for just under 6 trillion pounds. One hears that countries can't go bankrupt, but Greece is certainly insolvent and accounts for a further one third of a trillion, which will probably never be repaid to French and German banks who are therefore insolvent in turn. One can see where this is leading; even China has increased its debt to 235 % of its GDP, while the world debt is now a staggering 286 % of world GDP. Chinese growth rates are stagnating as they are struggling to sell their goods and are overproducing like mad, making their situation even worse and proving that control of economic free markets does not work. As economies shrink, they attempt to borrow more as their GDP and productivity become sluggish.
This is the final roll call for global capitalism it would seem, but only a few analysts are prepared to take the consequences of this fully on board. The very concept that economies would just grow and grow has now been disproved, because anyone can grow an economy if they borrow a large enough sum before they have to pay it back.
So before we hit another global crash which may well be the mother of all economic crashes, is there anything we can do ?
Actually there is and if one thinks about it, we have to consider the best interests of a younger generation who are going to inherit the nightmare scenario of a run away debt train and a shrinking economy. Here are some simplified UK figures :
Trillion pounds
Total government debt 1.5
Total mortgage debt 1.2
Total consumer debt 0.2
Total housing asset value 6.8
Total savings 3.5
Total GDP 1.8
Total government spending 0.8
Total pension funds 2.1
If interest rates increase, the mortgage debt would also increase as well as consumer debt. Every adult in the UK has an average credit card debt of 3414 pounds in July 2015 and an average mortgage debt of 25142, which means that annual interest payments are 1050, or 4.1 % of average earnings. The hope that consumer borrowing could keep on safely rising to grow our economy is based on wishful thinking, because if interest rates rose to 5%, it would vastly increase all these borrowings.
Housing asset value, like industrial asset values, is very large but subject to falls as well as rises. At the moment, the large increase in house prices in 2014 of 11% has more or less halved and is likely to decrease further. Of course, estate agents try to tell you that they will increase, but the fact is that first time buyers are not entering the market because house prices are so high and do not reflect incomes and the ability to afford mortgages. In any case, this is not free cash; it is tied up in bricks and mortar, so of itself it cannot solve this problem because people live in their homes and thus, they rarely become sold without needing to purchase another house.
So effectively, the main financial recourse available to free us of this public debt lies in the savings and pension funds.
When a government like Greece and Argentina becomes insolvent, it then raids people's savings or taxes them to the hilt. This is extremely likely to happen again, even here in Britain. It would simply be a repeat of what happened when many English kings overspent, like King John; they just raised taxes.
To forestall this, what I propose is this. Any savers in the UK are already seeing there savings stagnate or shrink with low interest rates. If we all collectively volunteered to donate funds to the public purse in order to pay off much of this debt, then this would give any future government the chance to balance the books, instead of paying out ridiculous sums in interest.
In return, the government would have to guarantee that it did not raise borrowing again, unless there was an emergency like a world war. Instead of having to worry that international lenders could effectively raise our interest rates and cripple our economy, the debt would be owed to UK citizens. Over a period of 5 or 10 years, the government would seek to reimburse part or all of these savings but it would be impractical to project precisely how long this would take if the world economy continues to slide. Individual savers who had need of a more immediate return of funds could be catered for, but as most savers are in it for the long term, it appears to be in everyone's interest to take the long view of this situation, as we were forced to do during the Second World War. There would therefore be a withdrawal of funds from banks and building societies, which might affect them to their detriment, but it would certainly be preferable to a run on a bank, as we saw with Northern Rock where all the savers lost out.
It is clearly in no ones interest if government debt does spiral out of control, least of all those vulnerable members of our society who are already suffering from the cuts. I personally, would be more than willing to donate to the public purse between 10 and 25% of my savings, which are earning no interest at the moment in any case, for the good of those who we are hoping will work to keep us in our old age.Of course, this would be a useless gesture if no one else agrees. If everyone who had savings voluntarily agreed to similar sums then this would set the public finances back in order. It might not totally remove public debt but it would mean that we were not in danger of being called up by international lenders and crippled by high interest rates. Anyone who had no savings, but had a house or other assets that they wished to lend some percentage of, could also contribute to this fund. It would certainly be preferable to the government having to tax people out of existence to pay the looming huge interest rates.
So if the kaka doesn't hit the proverbial fan, with unemployment now on the rise and the average family on Tax Credits to be 1500 pounds a year worse off next year, will there be still something for young people to look forward to as we did in our younger years ?
I certainly hope so.........
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