A modest proposal

The Quote of the Day comes from The Commentator (although, admittedly, it's actually from Friday), where Simon Miller echoes my long-standing contempt for most parts of the electorate.

And you know what? It is our fault. We constantly demand that the government should do something about a situation. Instead of common sense, instead of saying to our leaders “listen we’re adults, give us our money back, give us our freedoms back and we’ll sort ourselves out” we and the fast food media demand that nanny helps us.

Well nanny has spent all our money, taxed us to high heaven and is gradually removing all aspects of the rule of law through retrospective actions and interfering dogma. Instead of shrilling about this and that, we should give a simple message to these politicians, this is our country and it is our money you are spending. We are permanent; it is you that is temporary.

Quite. He actually uses another example that has pissed me off too—that of "low tax" aficionados who bitch and moan about families on fat salaries losing Child Benefit.

I consider Child Benefit to be one of the most stupid, pernicious and suicidal pay-outs ever invented—and it is not simply that I object to being robbed to pay for other people's lifestyles (although I do). It is because its very purpose is to encourage those on the margins—i.e. those who are not mature, sensible or intelligent enough to look after themselves, let alone a child—to have children.

And what is the result? Those who are vaguely successful are taxed to buggery, thus ensuring that they wait longer and have fewer children; in the meantime, the country is rife with a growing underclass of disenfranchised, ill-educated and hopeless youths who have neither the drive nor the wherewithal to ever look after themselves.

And before people start whining about this view being tantamount to eugenics (as I'm sure some will), it most certainly is not. Not paying people to do something is totally different from rounding up those you consider undesirable and systematically having them castrated or spayed.

And no—neither am I denying anyone their Human Rights: whilst having the choice to spawn might be a fundamental right of being alive, forcing other people to pay for them is not.

And, whilst we are about it, let's stop with the whole "we're leaving our children with oodles of debt" argument too: one way and another, a very great deal of that debt has been spent on them—their Child Benefit, their housing, their education, their Educational Maintenance Grants, their Child Bonds (or whatever it was called), and their parents' Working Tax credits (so they could pay for their kids).

That little lot adds up to well over £100 billion per annum—and I'm not counting every other expensive initiative that is done "for the sake of the chiiiiiiillllldren"—so I reckon that it's fair enough that the kiddie winks should be the ones to pay some of it back.

Come the rolling black-outs in 2014, I reckon that coal fires are going to become immensely popular again, as people struggle to keep warm.

So, start training your little darling now and, in a couple of years time, your little urchin can be earning a fine living up the chimneys—as well as doing their bit to pay back their debts.

Greece is like...

... according to John Redwood, another effectively bankrupt state... [Emphasis mine.]

If those countries are to have some hope of prosperity, they need to solve the two underlying problems. It is obvious to most external observers that the way to solve the problem of competitiveness quickly is to devalue. Normally, an IMF programme for a country in trouble not only asks it to cut its budget deficit and reduce its excess public spending, but suggests that it devalue its currency and move to a looser monetary policy domestically, so that there can be private sector-led growth, export-led growth—the kind of thing it needs to get out of its disastrous position. That is exactly what those countries are unable to do. That is why the IMF should not lend a country like Greece a single euro or a single dollar. Greece is to the euro area as California is to the dollar area: it is not an independent sovereign state, and it cannot do two of the three things that a country needs to do to get back into growth and prosperity, because it cannot devalue and it cannot create enough credit and money within its own system.

Exactly so.

Except that California is more like a quack doctor bleeding a perfectly healthy person—that patient is weakened, but still able to work and produce, to innovate and generate wealth.

Whereas the Greek situation is rather more akin to flogging a dead horse...

"Credit easing" explained...

... by The Daily Mash.

Osborne's offer of credit to thousands of small businesses will make Britain the first conservative-led communist state when the loans are inevitably defaulted and the government ends up owning and running everything.

Here's a tip, business peeps: if you absolutely need a loan, then you aren't a viable business.

It's only a matter of time

On the 25th of September, Dr Eamonn Butler wrote the following over at the ASI blog...

So, the eurozone and the IMF are putting together a £1.7 trillion fund to save Greece (and for that matter Portugal and Ireland) and stave off a default. Right?

Wrong. The whole purpose of the £1.7 trillion is not to give aid and comfort to Greece. It is designed to give aid and comfort to the European banks who are stupid enough to be still holding Greek debt when Greece is obviously bust. It is intended to allow—and indeed it will hasten—the inevitable default of a country [Greece] that is overspent, over borrowed, that cannot pay its way and shows no sign of putting its house in order—not one single member of its bloated and lazy bureaucracy has been let go, not one single item in the Greek government's bizarre portfolio of nationalised firms has been privatised.

And yesterday morning, I wrote...

... throughout the Western world, both states and the banks that have bought their bonds are, effectively, bankrupt.

Not only this, but the various governments do not even seem to understand that they are bankrupt, and are continuing to spend far more than their income; their one concession to the problem being to mutter futilely about cutting a few billion—out of structural deficits of many tens of billions—at some point in the next decade.

Even in Greece, public sector workers strike and riot as though their government had any alternative to the—frankly risible—cuts to public spending.

And tonight, I am greeted by this wonderful little nugget on the BBC website...

Greece has said its budget deficit will be cut in 2011 and 2012 but will still miss targets set by the EU and IMF.
...

The figures come as inspectors from the IMF, EU and European Central Bank are in Athens to decide whether Greece should get a key bail-out instalment.

Greece needs the 8bn euros (£6.9bn; $10.9bn) instalment to avoid going bankrupt next month.

Bankruptcy would put severe pressure on the eurozone, damage European bank finances and possibly have a serious knock-on effect on the world economy.

These politicians simply aren't taking this seriously, are they?

There is, I think, not one single Western economy that is not up to its eyeballs in debt: the vast majority of them are still running colossal, unaffordable deficits that are adding—every minute of every day—to that eye-wateringly massive pile.

And yet these politicos and technocrats keep throwing these vast sums of money about with the air of a millionaire lending a tenner to his mate—as though these vast sums of money were peanuts in the grand scheme of things. Not only are they not peanuts, they are largely illusory—there is no value behind the paper anymore.

In the meantime, the banks keep on buying the government debt hoping that—when the inevitable crash comes—the governments will not allow their buddies, the banks, to fail. In the end, there will be little choice.

Ultimately, the European Central Bank can print as much money as it needs: but, when it does so, the amounts required will be so mind-bendly massive that hyper-inflation will be the inevitable result.

The Western governments—and, just as importantly, their peoples—need to open their eyes and realise that this cannot continue: they need to understand a very simple, blindingly obvious fact...

The social democratic model—funded, as it is, on ever-increasing state spending on special interest groups using fantasy money—is bust. Kaput. Gone. Fucked beyond all measure.

And they need to realise it quickly. Because the impending crash is going to be bad enough: but the longer it goes on, the worse it will be...

Lending, inflation (and why I'm not a gold bug)

Charlotte Gore has posted an excellent article about lending, and the crucial difference between "good" debt and "bad" debt.

The point of this post is to attempt to tackle this idea that it doesn’t matter whether it’s the public sector borrowing money and spending it, or the private sector borrowing it and spending it—it’s all just cash and it all goes around just the same, creating demand for food and clothing etc. But there IS a difference, and that difference is everything. It is the difference between real growth—increasing wealth—and simply trading other people’s ability to create wealth in the future for short term political gain.

Now, this should be obvious but why does it mean that I am not one of those who constantly bang on about gold-backed currency? The clue is contained in the beginning of Charlotte's post...

So how is wealth created? Wealth isn’t merely cash. You don’t simply print bank notes and announce yourself to be wealthy. Wealth, real wealth is measured by value.

We all know that when a bank lends money, it conjures most of the cash out of the thin air, which sounds alarming… but it is hopefully repaid in full with interest in due course. The loan is supposed to be spent on things of value that generate—or save—more than the amount of the loan plus the interest.

In this way, wealth is created. Simple, right? A loan represents future wealth, future value. You borrow money to buy a car, you’re left with a unit of value—the car itself.

So, say a bank conjures money out of thin air for me, I spend it on a machine that allows me to make bottle caps, I then sell the bottle caps which eventually pays off the loan and then the rest, for me, is profit. Wealth has been created—represented by the existence of the machine and the bottle caps it produces.

The very point of a currency backed by gold—or so goes the theory—is that there is a very limited amount of gold in the world and, therefore, it is extremely difficult to create much more money. The government, for instance, would not have been able to print £200 billion of "quantitative easing" if the currency were backed by gold because there would be no gold to back that £200 billion. The point being, of course, that if the government cannot print more money, then you can reduce inflation significantly.

And here we'll take a swift diversion into the nature of inflation (as I understand it, at least)...

DK's terribly simplistic guide to inflation

Roughly speaking, the British economy is a little like a publicly listed company on the stock exchange. But whereas those companies have shares, we have pounds. Each pound in your pocket is a share of the wealth of Britain plc.

The wealth of Britain plc. is estimated by its GDP, its assets, its future earning power, its level of debt, the confidence that people have in its current and future potential, and hundreds of other factors. As such, the value of the pound in your pocket is affected (to a tiny degree) by the total worth of the economy of Britain plc.

More importantly, if the managers of Britain plc. decide to issue more pounds, then the value of your pound will be less because your share of Britain plc. has been diluted.

Just of the purposes of illustration, imagine that the value of Britain plc is £100, and there are 100 shares—of which you have one. Your share is 1% of the company, and is worth £1.

If, however, Britain's management decide to issue 100 more shares, then you will no longer hold 1% of the company—you will only hold 0.5%. Assuming that no more money has been raised, your share is no longer worth £1, it is worth 50p.

However, the reason that most companies issue more shares is in order to raise more money (for expansion, or whatever); thus, the chances are that your share is still worth at least £1, even though you do not own as much of Britain plc. in percentage terms.

Having issued 100 more shares, if Britain plc. managed to persuade the investors that the company was worth £200—or would be worth £200 in the very near future—then your share will still be worth £1.

However, if the investors decide that Britain plc. is worth £100 or less, then they will pay considerably less than £1 per share; now, not only do you own 0.5% less of the company, your share is also worth less than £1. Which is quite obviously not nice for you—not least because you will need to have more than one share to buy £1 worth of goods.

In other words, twice the number of shares have been issued, without Britain plc. being worth twice as much; your share is now worth less than it was before.

This is, roughly speaking, what inflation is.

Eh?

At the beginning of the year, Britain plc. issued 200 billion new shares, whilst the value was decreasing. Your share is now worth a lot less than it was before. And with your share being a pound, the pound is now worth a lot less than before.

This inflation process particularly destructive to savings, ensuring that the pound that you put away twenty years ago is now worth a lot less than a pound. Indeed, the total inflation rate since 1900 is 9348% (calculated here)! £1 now has less than one tenth of the spending power that it had just after decimalisation, in 1971.

Enter the banks...

Now, as we all know, the government is not the only agency that increases the money supply: the banks also do it, through a system known as fractional reserve banking. Broadly speaking, if I put £100 into the bank, the bank can lend out roughly £90 of that.

The full £100 is still theoretically in my account, and can be spent by me; but £90 has now been lent out to someone else, and can be spent by them. So, an extra 90 pounds has been put into the economy.

And this, of course, should cause inflation. And often does.

What the bank is doing—or should be doing—is advancing money that will, eventually, be backed by wealth (or worth). In other words, if the bank lends it to Charlotte's bottle top factory, the money gets repaid but, more importantly, that extra £90 is now backed by at least £90 of created worth.

The trouble was, as Charlotte so elegantly articulates, that the banks had forgotten that all of the money swilling about needed to be so backed.

It works because the people in the banks try to make good lending decisions. They want to be sure that the money they lend creates value, creates real wealth, because this is how they’re certain they’ll make their money back. They lend money to make it, and people borrow money to make it. Typically loans are ’secured’ against some real existing wealth—property of some kind—so that if the loan is not repaid there is still real wealth to show for the cash.

Now, in the credit crunch, when the banks were (and in some cases still are) refusing to lend, you can see how this causes a major problem for any economy that depends on it—and why it caused such a catastrophic contraction in our economy.
The reasons for their non-lending boil down to demands from the Government to increase the amount of cash they hold in their reserves and uncertainty that the wealth against which loans are secured have any real value at all. Housing that no-one will buy, for example, is very poor security indeed.

The credit crunch itself was caused by banks neglecting this most basic duty of theirs: Lending only when they are certain to get the money back, to take only good, well calculated risks. It turned out that too many loans were secured against very bad risks that other people had taken, resulting in everyone realising there was no security in the system at all whatsoever—and it nearly brought down our entire economy.

Indeed. Putting aside the banks' stupidity in this regard, the real and continuing problem is the unwillingness (or inability) to lend.

Let's say that I need our putative £90 in order to buy new bottle-top making machinery; obviously, I could save some of the profits from the company but it is going to take ten years to save enough.

But without being able to buy this new machinery now(ish), my competitors' cheaper but more exciting bottle-tops will put me out of business. As such, I need a big capital sum now, and I can then afford to repay it through my profits over the course of ten years.

Of course, I'll end up paying more (because there will be interest on the loan) but I will still be in business; and if I run the business well, and squeeze the most out of my bottle-top-making machine, I will even be able to increase my profits and therefore be better off than before. And, of course, I have increased the value of Britain plc., hopefully ensuring that the extra money that has been created is backed by real wealth.

Which is nice.

Interested?

Of course, lending puts more money into the economy now, and it is usually not backed by worth now. As such, there always tends to be a low level of inflation (at the very least).

When inflation gets higher, the usual method to try to reduce it is to raise interest rates. Why?

Because if you raise interest rates, you should reduce borrowing—for some people, that extra percentage on inflation will ensure that it is not viable for them to borrow the money and they will find another way around the problem (hopefully).

Or, of course, they will put off buying that 42" plasma TV because the World Cup actually doesn't look too shabby on the 30" flat panel anyway.

Gold

In a gold-backed currency, the gold represents the worth of the currency. So, if you want to print more money or lend some out, then it needs to be backed with actual, physical gold. Over a century ago, most of the developed economies operated in this way, and used the international Gold Standard as a calibration.

The upside of a gold-backed currency is that inflation becomes almost non-existent. Taken from this government PDF, the chart below shows retail price inflation since 1900: Britain left the Gold Standard in 1914 (to fund the vast monetary expansion required to fight the First World War).



The downside is that you cannot lend in the same way—as such, economic growth is, necessarily, a lot slower. From the same PDF as above, this chart shows economic growth over the same time period.



Now, one hopes that the growth in wealth will always outstrip inflation and that, as a result, everyone is considerably richer at the end of the exercise. As a general rule, this has been the case over the last century or so.

This process of getting richer, of course, is also helped by the rise in productivity which is driven by competition. It is self-evident that TVs are far, far cheaper than they were even half a century ago, and computers and other labour-saving devices have also become cheaper and cheaper.

So, you have to make a choice...?

Do you prefer near zero inflation, or a far faster enrichment of the general population. Broadly speaking, I prefer the latter because, ultimately, it delivers the most utility. In other words, more people getting richer more quickly is better than zero inflation.

On the other hand, saving for old age is rather harder, since you have to contend with inflation.

Which is why the Libertarian Party policy allows for multiple currencies—one backed by gold, one by the government and then others by the banks themselves. In this way, you enable the lending that drives growth, but also allow a store of currency that maintains its value.

Importantly, you also put currencies in competition with one another, allowing for fluctuations within and between those currencies, whilst maintaining a base currency that holds its value over time.

Perhaps we really could have it all...?

New debts? What a surprise...

I'm sure that no one saw this coming...

THE government last night accused Labour of pursuing a “scorched earth policy” before the general election, leaving behind billions of pounds of previously hidden spending commitments.

The newly discovered Whitehall “black holes” could force even more severe public spending cuts, or higher tax rises, ministers fear.

Memo to the taxpayers of Britain: get ready for a massive shafting.

The “black holes” that ministers have already unearthed include:

- A series of defence contracts signed shortly before the election, including a £13 billion tanker aircraft programme whose cost has “astonished and baffled” ministers.

- £420m of school building contracts, many targeting Labour marginals, signed off by Ed Balls, the former schools secretary, weeks before the general election was called.

- The troubled £1.2 billion “e-borders” IT project for the immigration service, which, sources say, is running even later and more over-budget than Labour ministers had admitted.

- A crisis in the student loans company where extra cash may be needed to prevent a repeat of last year’s failure to process tens of thousands of claims on time.

- The multi-billion-pound cost of decommissioning old nuclear power plants, which ministers claim has not been properly accounted for in Whitehall budgets.

- A £600m computer contract for the new personal pensions account scheme rushed through by Labour this year, which will still cost at least £25m even if it is cancelled.

Maude, who has been given the task of reducing Whitehall waste, insisted that ministers were not scaremongering to paint their predecessors in a negative light. He said there was widespread concern that Labour had become particularly spendthrift in the run-up to the election campaign.

Given the scale on which Labour have been spending for the last ten years, the fact that they have become "particularly spendthrift in the run-up to the election campaign"—whilst hardly surprising—should worry us all very, very deeply.

Mainly because we are going to have to dig very, very deeply into our pockets in order to pay for it all.

With speculation growing that Osborne is planning to announce an increase in Vat from 17.5% to 20% next month, there are growing fears he could face a tax revolt from left-leaning Lib Dem backbenchers.

Lib Dem MP Simon Hughes said on Radio 4’s Today programme yesterday: “Our party remains an independent party. We will take views. We don’t suddenly change our policy.”

As I said, get ready for another election very, very soon...

Brown has gone

Gordon Brown: with no magic picture in the attic to bear the mark of his soul's evil, James Gordon Brown's face looks like some kind of Chapman Brothers nightmare sculpted in melted wax, hanks of greasy hair, decades-old plasticine and fresh dog turds.

So, Gordon Brown's hard-bitten fingernails were finally prised from the floorboards of No 10 Downing Street on 11th May 2010—a date that should, quite possibly, be declared a national holiday. People could organise street parties, burn effigies of Gordon and generally have a massive celebration. Apart, of course, from those 8 million or so arseholes who voted Labour on the 6th.

Your humble Devil has expended many thousands of words on the failings of our loathsome (but thankfully erstwhile) Prime Minster, and there seems little point in attempting to waste more time on this unpleasant little man—not least because The Nameless Libertarian has done so most elegantly. I cite a few choice cuts, though I recommend that you read it all.

Ordinarily, I'd try to avoid kicking a man when he's down. But when that man happens to be Gordon Brown, I'm afraid I'll have to make an exception.

There's no nice way to say this, but it needs to be said nonetheless. Gordon Brown was a failure as Prime Minister. Every single test he met, he failed at. His departure from Number 10 yesterday wasn't some tragic curtailment of an otherwise flourishing career - it was the inevitable end of a premiership that, in retrospect, should never have happened.

Furthermore, Brown's legacy of abysmal failure began long before he set foot in Downing Street. He set himself up for a fall while still Chancellor, with his talk of ending "boom and bust" that turned out to be nothing but hot air. It is true that he was perhaps the most effective opposition to the odious Tony Blair within the Labour party, but that was not out of ideological difference or political conviction, but rather about naked lust for power.
...

Gordon Brown's economic policies stand as a rebuke to those that state that government spending gets you out of recession. Government spending can help in a financial downturn, but throwing money at the problem doesn't make it go away, and actually creates another problem - a massive government deficit that will force cuts in future government spending. Some argued that Brown knew he was going to lose the next General Election, and so he was involved in a scorched earth policy to screw his replacement in Number 10. His economic policy was so bad that this idea actually seems credible.
...

Brown was the cowardly, unelected Prime Minister who when he did face an election, was soundly rejected by the people he purported to represent. And even then he didn't go. No, he tried to stay on, and when that was no longer possible, he went on scheming to keep himself in Number 10 for as long as possible and his party in power despite the verdict of the electorate. The arrogance and the unthinking sense of entitlement was with Brown to the very end of his time as a political leader.
...

The cancer has been painfully removed from the Labour party, but it now falls to them to find their way again. The scars will be deep, and difficult to heal - particularly given the party's atrocious behaviour after it was defeated at the polls. It needs to see Gordon Brown not as the brave and courageous leader that unthinking acolytes and lazy hacks are now trying to make him out to be: instead, he must be seen as he actually was - an arrogant, cowardly, bullying failure.

There'll be occasions moving forward, when the next Labour leader falters or when the coalition struggles, when people might be tempted to look back on Brown favourably, through those rose-tinted glasses that always seem to make leaders more popular once they are out of power and no longer a threat. Those people should remind themselves that Gordon Brown was the worst Prime Minister we've had since World War Two - unable to govern, unable to get the legitimacy to govern, and without even the most basic charm to aid him.

The only substantial aspect of Brown's career that TNL doesn't really mention is the myth that this maniac managed to build up—the myth that he was some kind of one-man academic powerhouse. He was not.

It is recorded, for instance, that Brown went to university "at the same early age of 16". This is far from being uncommon in the Scottish school system: I knew a good few people at Edinburgh University who were 16: they were not particularly intelligent, they had merely taken Highers whilst eschewing Sixth Form Studies or a Gap Year. Personally, I always felt rather sorry for such people: not being able to drink legally whilst at university would, ironically, be enough to drive anyone to drink.

At university, he read History—not Economics, as many seem to think—and seems to have learned precious little from that. Brown then spent ten years gaining his PhD; once again, the subject was nothing to do with economics: no, his PhD thesis was entitled The Labour Party and Political Change in Scotland 1918–29. From that point on, Brown's career was punctuated by a number of mediocre jobs until his election to Parliament in 1983.

I feel that I must stress this once more: Gordon Brown was not tremendously clever, and he had absolutely no training—and, it appears, almost no knowledge—at all of economics. And the result is his near-criminal ruination of the public finances.

Gordon Brown was an integral part of the NuLabour project—a hideous chimaera that has wrecked the education system, throttled social mobility, swept away centuries-old civil liberties, enslaved the British people in a near-police state, accelerated the fracturing of society, pulverised the national finances and expanded the state to unprecedented levels.

Gordon Brown may no longer be in power, but w will be paying for the consequences of his actions for decades to come. So, I urge you all to postpone the national holiday, take the trestle tables back indoors and put the bunting back in the understairs cupboard.

Let's save the celebration for when Gordon Brown finally dies.

Just for emphasis

Immediately after publishing my last article, I saw that Wat Tyler had posted on the scale of the debt again.

There'll be no room for shilly-shallying—the cuts will have to be commensurate with the scale of the problem. And just in case anyone's forgotten that scale, a BOM correspondent in Singapore has recently sent the following chart produced by Citi Global Markets to advise their clients.

It shows the amount of fiscal tightening needed by each of the major economies in order to get government debt back to the maximum safe sustainable level relative to national income (the maximum level reckoned by the IMF and others to be 60%):



As we can see, with the single exception of Japan, we in the UK have a bigger mountain to climb than anyone else. According to Citi's analysis we need to tighten fiscal policy by a whopping 12% of GDP. In plain English, that means the next government needs to cut spending or increase taxes by £180bn pa (in today's money). Which in round numbers is the equivalent of:

• £7000 pa extra taxes/ lower spending per household;


• increase in the basic rate of income tax to 65p; or


• increase in the standard rate of VAT to 57%; or


• 25% off total public spending;

So there is no room for hesitation. And no time either. The longer we leave it the worse it's going to get, as mounting debt interest compounds the problem.

And for the those who say it would be better to call in the IMF and blame them, we invite you to watch the TV coverage of the Greek riots. The IMF is no easy option, and the IMF will give us little leeway to set our own priorities.

Not to mention, of course, that such an action would screw confidence in the British economy for decades to come.

Something needs to be done, and quickly.

The scale of the crisis

"We’re trying to keep a fire going by throwing on £50 notes with one hand, and buckets of water with the other."

The ever excellent Charlotte Gore (who I was most pleased to meet in the flesh at the ASI's Blogger Bash) has a post up about the scale of the debt that this country has established—and which it is still racking up.

The Government, you see, is currently overspending above and beyond what it takes in tax on an epic scale, and all three leaders say they want to sort that bit out. All well and good, but none will address the perversion of Keynesian thought that got us into this mess in the first place. Even Keynes thought the absolute maximum tolerable proportion of Gross National Product to be spent by the state was 25%… and we’re approaching 47%. In parts of Britain the public sector is 70% of the local economy which puts Soviet Russia to shame. We’re trying to keep a fire going by throwing on £50 notes with one hand, and buckets of water with the other.

Quite so.

And no one really really seems to understand just how much trouble we are in.

Just because all three parties are talking about cutting the deficit doesn’t mean economic liberalism is experiencing some kind of renaissance. It just means things are probably much, much, worse than we fear.

I'll raise you a "much" there, Charlotte: things are much, much, much worse than we fear.

The scale of the debt

There are a number of contributing factors here...

• NuLabour's spending splurge has racked up colossal amounts of debt already—near to 70% of GDP. Or, to put it in easier to understand terms...
  
  The government is currently borrowing about £0.5 billion per day. To put it in perspective, that is about what it costs to run Parliament for an entire year.


• Our structural deficit is just less than 10% of GDP—or about £150 billion.
  
  As we know, for the last couple of years, the government has been borrowing more like £170 billion per year. The structural deficit is, basically, the difference between what the government is spending and what it takes in tax that will still be with us when the recession is over.


• Currently, simply paying the interest (at about 4.5%) on this colossal amount of money is about £40 billion per year—more than the Defence Budget.
  
  If the market thinks that there is a high chance that the government might default on its debt or try to inflate it away, then investors will demand higher Gilt Yields (effectively, a higher interest rate).
  
  The higher the debt gets, the more likely it is that the government will try one or both of these strategies, driving interest rates higher. They are currently hovering around the 6.5% mark. In the 1970s, the rate reached close to 18%!


• Not one of the Big Three parties is proposing any plan to seriously mitigate any of this—all of them are proposing cuts of about £50 billion but none of them has set out in concrete terms how they are going to achieve this.
  
  And even if they had, £50 billion is only about one third of the structural deficit. In other words, even if the government makes £50 billion of cuts, it will still be borrowing £100 billion per year.
  
  Which means that not only will it not even be paying off any of the National Debt, it will be adding to it at the rate of £100 billion per year.
  
  As a result, the interest rate on Gilts is going to continue rising unless there are some serious cuts. (And if Labour get in, we going to be seriously screwed.)

"OK. Yeah, sure, Devil," I hear you cry. "But we're pretty big, economically: surely we aren't going to end up like Greece, are we?"
Hmmmm.

Total Fiscal Collapse

A couple of weeks ago, I was talking to the Taxpayer's Alliance's Research Director, Matt Sinclair, who is a very worried man. Matt pointed me towards a post summing up one projection of just how comprehensively screwed we are if something isn't done urgently.

Now a new report shows that the long term problem is even more serious. The Bank for International Settlements has looked at the picture in the longer term and the projections in its new report [PDF] suggest Britain faces the worst long term fiscal position of any of the countries it has looked at.

First, look at their projections for debt as a percentage of GDP. There are three lines on these graphs. The first - in red - is what they expect with present policies. The second - in green - is with a gradual fiscal adjustment, the BIS have worked on 1% of GDP a year for five years. The third - in blue - is with that gradual fiscal adjustment and a freeze in age-related spending as a share of GDP, which would be incredibly difficult given an ageing population.
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Without policy change debt rises towards 550% of GDP in 2040 and even with the kind of fiscal adjustment the Government is planning (but not setting out a credible plan to achieve) debt will be rising towards 400% of GDP. Even freezing age-related expenditures won't get us off the hook:



The only country projected to run up bigger debts is Japan. But it gets worse when you look at how affordable those debts will be, which comes down to debt interest payments. It's just like a mortgage, people don't have their homes repossessed because they owe too much but because they can't make the payments.

Thanks in part to quantitative easing, we've had a relatively easy ride on that front so far. But this year the Government expect to spend more paying debt interest than they will on public order and safety. And I wrote yesterday about how that could get much worse quite quickly. The BIS present estimates of how debt interest costs could increase. On that score Britain faces the worst position of any country they looked at with debt interest rising in the baseline scenario to an incredible 27% of GDP:



Wat Tyler puts that in more tangible numbers, setting out the scenario we'll face if politicians don't get the deficits under control:

"Or to put it another way, by 2040 the average family would be paying (in today's money) over £10 grand every year just to pay the government's debt interest bill."

To do a quick back of the envelope calculation, our GDP is currently nearly £1.5 trillion. 27% of that is just over £400 billion. There are under 26 million families in Britain, which means the bill will be equivalent to over £15,000 per family today. And of course you would expect GDP to be a lot higher in 2040 which will inflate those numbers further.

The very important point to emphasise is that under the current plans of all parties, we are still heading for a debt of 400% of GDP. And if that happens, by 2040 we would be paying 27% of our GDP every year—some £400 billion at today's figures—just to pay the interest on our national debt.

Of course, as Matt pointed out, this figure is reasonably irrelevant since we would face total fiscal collapse long before that happened.

Whoever gets in at the next election—whether by a majority or in a coalition—desperately needs to get a grip on the nation's finances. And that is going to mean massive spending cuts in all areas of government; if this does not happen, the alternative is stark.

If that isn't done, we are heading for a prolonged and devastating economic crisis.

And simply raising taxes is not going to help either.

Think you can deal with that deficit through tax rises? The BIS agree with us that isn't a sensible way forward:

"Taxes distort resource allocation, and can lead to lower levels of growth. Given the level of taxes in some countries, one has to wonder if further increases will actually raise revenue."

Tax rises might increase revenue in the short term by taking more money out of people's pockets, but by undermining growth high taxation and spending will mean less revenue over time.

The argument is stronger even than that. BIS projections assume a 1% per annum growth in the economy up to 2040. Although savage cuts will still need to be made, one way in which the effect of these might be mitigated is through allowing the economy to grow considerably faster than this.

Going for broke growth

And the single best way to allow an economy to grow is to lower taxes. Via Burning Our Money, a November 2009 report from the New Policy Exchange featured a chart that showed this very neatly.



And to emphasise the point, let's return to Charlotte Gore's post, which spells out the issue very clearly.

No matter which party forms a Government, we’re going to get a very, very similar Government to the one we currently have.

It’ll be largely social democratic in nature, with a huge public sector that’s desperately trying to compensate for the weak private sector to give the illusion of a healthy economy.

Libertarians like me argue that the weakness of the private sector is in no small part due to the overwhelming redirection of national product into the public sector, and so waiting until the private sector sorts itself out before rolling back the public sector is a) Mental b) Wrong and c) Going To End In Tears.

The Government, you see, is currently overspending above and beyond what it takes in tax on an epic scale, and all three leaders say they want to sort that bit out. All well and good, but none will address the perversion of Keynesian thought that got us into this mess in the first place. Even Keynes thought the absolute maximum tolerable proportion of Gross National Product to be spent by the state was 25%… and we’re approaching 47%. In parts of Britain the public sector is 70% of the local economy which puts Soviet Russia to shame. We’re trying to keep a fire going by throwing on £50 notes with one hand, and buckets of water with the other.

And, in short, this is why there’s not enough jobs. There’s simply not enough stuff going on, so we have millions upon millions economically inactive, and an ever smaller number of businesses and people to pay for the ever growing public sector. This isn’t sustainable, or desirable, and truth is that the only choice is stop doing it or be stopped. That’s the choice.
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The challenge for the next Government (as set by the three leaders) is simply to get public spending down from “let’s just hand the keys to the IMF” to “catastrophically expensive.” But even if the deficit could be reduced to zero overnight, the Government would STILL be consuming too much of the National wealth.

Quite. The more costs that you impose on business, the less business there will be—it's not a difficult concept to grasp.

And it's a concept that the government does understand—after all, why else tax cigarettes? The government (theoretically) wants people to give up smoking, so it taxes cigarettes so that you have fewer smokers. If you tax businesses, you will get less business.

The Solution

In the end, the solution must be something along the lines of that enacted by the New Zealand government of 1984 (the post on which is recreated from the DK archives below): not only a massive cut in government spending and a consequent consciousness of how—not how much—money is spent, but also a massive cut in taxes (and regulatory burdens).

But I fear that only the total fiscal collapse predicted will force the British public to face up to all of this.