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 !
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