Monday, 29 November 2010

UK Debt is not a problem!

Liberal-Conservative coalition is convinced that their emergency tightening of the budget is the right thing and that the economy will cope. I'm not so sure and here is why.

I’d hate to repeat my self on the topic of why the UK economy is a mess… as discussed in my article on the fallacy on the 0.8% growth figure and my analysis on the latest OBR prediction the economy is not doing as well as the present Government would suggest with its policies.
Basic theory dictates if you withdraw fiscal stimulus (low taxes and high Government spending) then you will strain the economy and perhaps knock it back into recession. In this case we have a very weak recovery with a Government about to introduce tax increases, public sector cuts and benefit withdrawal, this would point to economic suicide. But why is the Government doing this? Because the country is ‘bankrupt’ we have the ‘worst deficit in the G20’ a ‘debt time bomb’ and we have to do something about it! Here is a novel idea… how about not bothering about the debt?

101 reasons not cut Government spending (now)
1) Firstly lets look at what economists consider the main objects to target in the economy. 1: GDP growth, 2: Inflation, 3: Unemployment, 4: Balance of payments (money going in and out of the economy). To pure economists these are the main objectives to target, is Government debt one? No... Government debt or what economists call the PSNCR is the 5th objective that is often omitted from the list. Why bother about it?
2) Ok so just because economists don’t list it, as a main objective does not mean it is important, in fact in resent years focus has been on equality and happiness also. But still number two Government debt does not have a direct effect on the Economy.
3) When a nation goes into recession something know as automatic stabilizers kick in.  These help stabilize the economy but increase Government debt short term. Automatic stabilizers consist of: lower taxes because of higher unemployment, lower wages and less profits and higher benefits to unemployed. A vast proportion of the debt is automatic stabilizers.
4) The UK Government bought out RBS and shares in other banks to stabilize them, this is not lost money! These shares were bought low and can be sold back later… that’s not debt that’s investment.  Bank bail out shares can be sold back at profit!
5) The Government is not anywhere near bankrupt! We have AAA rating that’s far from bankrupt. If we were bankrupt all our money would be worthless
6) The way the Government raises finance is by selling bonds, these are promises to pay the barer the sum of money on a date, these bonds are fixed we have a long time to pay them back. Why not wait?
7) Ahhh but you say that who will buy these shares? Well shares are bought on the bond market, so has this market been more reluctant to trade out bonds? Has it heck! People will buy our bonds. 8) But that’s not the issue, the issue is that our interest goes up because we have to attract people to buy them. True the price is increasing (which is bad) but it is by no means much by international standards and at just under 4.5% it is less than most consumers could get a loan.
9) Journalists like to compare debt to a persons debt… well consider this how much was your house worth when you bought it? How much were you earning? Now work out the value of the house against your yearly salary… that is your equivalent to government debt now. I should image its quite high? Government debt is around 70%.
10) How about me? Well a rough estimate tells me after I’ve taken my university loans and worked out my income its rough estimate of 660%. Oh no I best panic and sell my laptop… what!?
11) This is a key one: DEBT IS REDUCED WITH TIME – INFLATION ERRODS DEBT. Take out a loan for £100 now, and spend it when you come to pay it back a  year later assuming inflation is 2% your debt is worth 2% less because the person you are now paying £100 too will need £102 to buy what you bought with it last year. That’s inflation!
12) So remember that figure of 4.5% interest on Government bond repayments. its actually 2.5% if you negate inflation. That’s assuming inflation is 2%. It is actually 3%+ at the moment.
13) Compared with the past our debt is minimal:

14) compared to recent past it is minimal:

15) Debt is at a fixed point in time. If our debt is 60% of GDP in 2010 by 2030 it is likely out economy will have grown by 40% so the debt will be proportionally less of our countries income when we come to repay it.
16) If we cut spending now we will lower Government spending that will lower AD (total demand or spending) which will lower GDP17) If we cut spending now we will cause unemployment, like the 2+ million predicted from the budget.
18) If we increase unemployment we will likely increase crime.
19) If we decrease public sector budgets there may be union action20) Cuts to infrastructure will damage UK business! (damages AS)
21) Cuts to the education system will mean the next generation will have less knowledge/skills so the economy will suffer in the long run. (reduction in supply side)
22) People made unemployed in the public sector will spend less money, so those in the private will suffer! 23) People with less benefit will spend less money, so those in the private will suffer!24) The last time we were in this situation we found our self in a depression then WW3…
25) maybe we should not cut our military in just in case.26) Increasing Taxes such as VAT to 20% is recessive creating more inequality.
27) If we go into double dip the automatic stabilizers that are out of the Government control will increase making the debt worse!
28) If we continue to support GDP by spending then automatic stabilizers will fall and are falling! 29) Government deficit is already falling; even without a budget slashing Spending things will begin to get better.
30) Next time the economy is in ‘overheat’ we can reduce spending to stop a positive output gap and prevent another recession. 31) Next time we have high demand pull inflation we can deduces spending to create a positive Government account and pay back some of the debt and sole inflation problems.
32) Ireland is in economy difficulty and so it 33) USA this means we will have less exports to these countries and they are our main exports. This is bad for the economy Government needs to make up for this fall in exports.34) House prices are falling, this is a signal that the economy is becoming heading towards recession, surely this would suggest we do not have a strong enough to take the hit of cuts. 35) Equally consumer spending is falling36) Unemployment is a lagging indicator, so if we go into a double-dip which theory states we may do if we cut back now then unemployment will only get worse and say like that for a long time.
37) Those employed by the public sector have skills that are not valued by the private sector! Crowding out theory suggests the private sector will create jobs with cut backs, how can this happen. What kind of private sector business wants to employ millions of civil servants? 38) Those unemployed require training to get back into the labour market, how can they do this with increased tuition fees, less adult education etc..
39) The longer people are unemployed the more their skills depreciated, the focus should be spending to get unemployed back to work not creating more unemployed making it more competitive for people to find jobs.
40) “
the number of vacancies for the three months to October 2010 was 453,000, down 27,000 over the quarter” –ons Where are the jobs for the unemployed and soon to be unemployed?41) Front line services will be cut WITH implications to their service provided.
42) Government bonds are sold to the general public, the government represents the public. we owe our selves money? – a bit of  a silly argument granted. However:
43) The UK created £200bn in Quantitative Easing, the other name for this is Asset purchasing. This means we purchased £200bn worth of bank and Government debt. The proportion we bought from the Government can be written off.
44) If we do go into a double-dip then we can’t lower interest rates to raise AD and help us back into recovery because they are at 0.5%
45) Equally if we go into double-dip it would cost more to launch a new stimulus package to bring us back to positive growth than it would be to simply wait before cutting the debt

At this point the time opportunity cost of listing another 56 
would out weight listing them so I will chose to stop this list here… 

The point is why are we so concerned about this debt! Yes it is a problem but we can pay it back later when we have good strong growth, as Labour should have done during the recent boom.

Another interesting read on the subject can be found on the Hutton Economics Society website: The National Debt? Timebomb?

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