In the wake of the worst recession for over 100 years, it seems a logical necessity to bail out indebted banks in order to prevent financial chaos. After all, the UK has always been able to rely on complex fiscal and monetary policies to stabilise its debt.
However, are we not forgetting that the government is also constrained by the straight jacket, that is, money?
Public sector net debt is now estimated to be a whopping 54.7% of GDP (£774.8 billion). The month of May alone saw public sector net borrowing increase to £19.9 billion (once half of the borrowing requirement for the entire year).
What has shocked me is not merely the enormity of the debt, but the social risk that the government has exposed us to. A risk borne by the tax payer.
The fragility of this problem has been reiterated by credit agency Standard & Poor’s, which last month warned that it could downgrade Britain’s top-notch AAA rating because of the deteriorating state of the public finances.
If Britain was to see a credit downgrade, it could prolong and deepen the current recession. The consequences of a credit downgrade should not be underestimated. Not only will the tax payer have to pick up the bill, either through higher indirect (e.g. VAT) or direct taxes (e.g. Income tax), but there is also a big question mark over the efficiency of our public services. Already an ageing population has put a strain on our hospitals and other public services.
Under the surface is more bad news. With fiscal policy already stretched to its limits and interest rates at rock bottom (0.5%), the Treasury seems to have, in desperation, used ‘quantitative easing’. This was tried by Zimbabwe and Japan with disastrous effect. This strategy to print more money has been used only as a last resort in the West, because of the dangers of inflation. This risk taking shows how serious this crisis is.
Core inflation rose from 1.5% to 1.6% over the last 12 months. Accordingly, the dilemmas facing the government are even more acute.
So what needs to be done? No political party wants to be associated with public spending cuts, but more effective spending is required. This is something that the Prime Minister and the Chancellor have never been able to achieve.
What is crucial is to protect the grass roots of our economy. Confidence is paramount. More incentives for small business and entrepreneurs, who are the seeds of our growth. We also need, not more regulation, but more effective regulation of the banks. We need more responsible banks and less banksters.
Thank you, Lord T, for attempting to shed light on our economic gloom. From whom, I find myself wondering, have we borrowed all this money? Bankers, presumably? In order to bail out the…erm….bankers…
If only we were all bankers.
I see one of the TV programmes, is it Newsnight, is featuring a ‘dragon’s den’ for people with bright ideas on trying to sort out the mess. So far, removing universal benefits for those on £30,000+ incomes has been ruled out, one or two ideas have been adopted.
My own bright(?) idea would be a straight 20p levy on all ATM machine transactions. I’m unsure how much that would raise, but I would suspect that it would have the great merit of costing virtually nothing to collect, and would make a meaningful contribution over time.
stephenpaterson: The biggest long term debt item is the public sector pensions liability (PSPL). Figures vary depending on who you believe but to take an example Policy Exchange quote figures of 750 billion for the national debt and 1.1 trillion for the PSPL
Lord Taylor: What one might ask is what has the Commons been doing since 1909 when the Liberals gave the nation a ‘Peoples Budget’. In a nutshell it has been redistributing wealth and the process continues apace even now.
The Commons has had a mandate to improve the lot of people and as people have grown ‘wealthier’ they have become the focus of Treasury taxation. The public now have a partnership with the Treasury, a fifty-fifty arrangement.
You earn ten pounds and the Treasury will takes away five. If you fail to pay the Treasury on time or whilst staying ‘within’ the law you are perceived to have bend the rules the authorities will fine or imprison you for breach of contract.
Circa 1909 the Treasuries coffers were not that full because the general level of taxation was very low. Any attempt by the Commons to increase spending was constrained by the House of Lords because of the lack of revenues. In other words the Treasury had little money and the House of Lords was determined that it was well spent.
The prevailing politics of the time was self-reliance, low taxation with no succour for the poor. Now the prevailing politics is state dependency, high taxation and wealthy suckers. God bless the sacred ‘poor’ who have made this possible for us.
Now we have come full circle. The Treasury has no money but ‘nobody’ constrains Commons spending, least of all the House of Lords. The government without an act of Parliament takes it upon itself to immerse the nation in enormous amounts of debt, on faith, that things will turn out for the best without any MP ensuring his or her constituents get the best deal.
Meanwhile National Insurance, it is not a tax, protects the NHS and other welfare systems from cuts; solution put up National Insurance, keep the target the same and cream off the surplus as general taxation to pay off some of the debt. This is a betrayal of the principal of the ‘Peoples Budget’ of 1909.
We need a mechanism once more to oppose Commons budgets and taxation policy.
Ref: Old Age Pension Act; Peoples Budget
http://www.spartacus.schoolnet.co.uk/Lold.htm
Thank you for all your responses.
Stephen – I agree with you that something drastic needs to be done to stabilise public debt.. Your suggestion to increase indirect taxes may not, however, be the most popular proposal from any government. The suggestion of using entrepreneurs ideas is a good one. With input from the private sector into the process and regulation of public finances, we could see a much needed boost in public confidence. After all it is their money which the government uses, so why shouldn’t the public have their say?
In terms of where the government borrows its money, the Treasury has two mechanisms which it can use to raise funds. Firstly through issuing bonds, which ultimately is borrowing from the private sector, and secondly by printing money (quantitative easing). The latter is potentially extremely inflationary.
What cannot be stressed enough is the importance of restored confidence. If confidence is restored then the credit markets will begin to flow again, and the government will be able to return to more traditional methods of raising money through issuing bonds. That is, being able to raise money from the public and for the public.
Senex – I believe that it is essential that the House of Lords tries harder to make the government accountable for its spending behaviour. I agree with you that the government needs more effective regulation on its budgets and taxation policy, but it also needs to be more transparent. Yet again the government is failing to do this. We must not forget that the European Parliament may yet impose its own regulations, since many of the banks have European offices.
Yesterday they announced that it would not present us with its spending plans before the next general election. This is depriving the public of its right to know. As a tax payer, you should have the right to hold the government accountable for its spending plans and be able to see whether their plans are value for money.
I rather suspect that whoever is elected next May/June will have to use both cuts in public spending and increases in taxation to drive the debt down, and that it will boil down to a question of emphasis. Something of a saving grace might be the income from the banking sector we now seem to own a lot of, together with income from selling our shares if & when deemed appropriate. Still seem to have their toxic assets though.
I’ve just read that our new Home Secretary has ditched compulsory ID cards, which is one albatross out of the way. I had a feeling it was to be Labour’s Poll Tax.
Can’t seem to generate a feeling of ownship over my local NatWest, don’t know about you. Wonder what they’d say if I just popped in for a cup of tea?
Next ‘dragon’s den’ on the situation is on Newsnight tonight, I think (or was it last night?)