The British government often congratulates itself on its efforts to keep public finances on a stable and sustainable level. Yesterday Gordon Brown even claimed: "Debt is considerably lower than a decade ago". However, Britain's public debt is actually £1,866 billion, equivalent to 125.5% of GDP, nearly three times larger than the government's published figure of £645 billion and 43.4% of GDP. This measures out as a debt of £76,475 per British household. While figures recently released on the scale of the government's public spending bonanza point to government borrowing leaping to a record £8.1 billion in September, this is only the tip of the iceberg. Opaque off-balance sheet measures have, until revealed in The Price of Irresponsibility published by the Centre for Policy Studies, kept hidden the full cost of projects financed through the Private Finance Initiative, the extent of unfunded public sector pension liabilities, the debt incurred by Network Rail and the recent nationalisation of Bradford & Bingley. Yet, the figure may be much worse. While the exact impact on the public finances of the government's recent bail-out of the banking sector is as yet unknown, it could imply an addition of as much as £500 billion to the balance sheet. This would increase public debt to a massive £2,366 billion, which is 159.1% of GDP, or over £96,967 per British household. Hiding substantial liabilities off the government balance sheet has enabled it to circumvent Gordon Brown's much-lauded "Golden Rule" and "Sustainable Investment Rule". Political expediency appears to have won out over the need to plan prudently for the country's future. Perhaps the most compelling narrative to be found within the story of public debt is that of transparency, or lack thereof. Without any hint of apparent irony, the government is calling for greater transparency and accountability in the private sector. This is a fine aim, but it must also be matched by transparency in the public sector. To fail to do so risks treading a dangerous line of hypocrisy and double standards. The government also has a responsibility of honesty to the British taxpayer. This extraordinary level of public debt is pushing the costs of current spending onto future generations of taxpayers. In the current economic climate, at a time when British households and businesses are already grappling with the credit crunch, they are now being saddled with more debt than ever before. Yet, the government still pledges to continue borrowing and to spend Britain's way out of the current economic crisis. With already one of the largest budget deficits in the world, the government will simply not be able to continue in this manner. The public spending binge that has brought our public debt up to £1,866 billion by the most conservative estimates is unsustainable. The government must recognise the true scale of public debt and bring some much-needed transparency on to the books before the public finances spiral even further out of control. The sad fact is that PFI deals have proved to be more expensive, to offer us less value for money but because of the statistical treatment afforded to them, the government chose to use them so it could hide the debt off the government books. So debt statistics appear to be more important to the Treasury than value. If the Treasury wants transparency from the banking sector, it has to be transparent when it comes to its own off-balance sheet activities. With funding costs rising, it's quite likely several PFI schemes go belly up and the tax payer has to pick up the pieces. Face the truth? That the entire last decade of "prosperity" was nothing of the sort? The whole nulabour "third way" was a lie? No bloody chance. Haven't you heard we're going to "spend our way out of a recession"? I'm only wondering, what with? What's left? We've running out of future generations to mortgage. High tax, profligate spending, zero personal accounatbility- all traditional qualities of a leftist administraion. Then suddenly eveything goes tits up and it's all the fault of the markets and the only response the governmetn has is to spend even more of our money- really the mind boggles. Hi Good article I would only like to add the fact that this massive deficit has been despite the peak earning years (and tax payments) of the baby boomers who were born 1946-1963 and are shortly to start retiring in droves. Not only will this tax source disappear as these people retire they will also be expecting the government to pay for them for the next 30 years due to the fact that the combination of the credit crunch and the pension raid has decimated their savings A final nail in the coffin is the fact that North Sea oil production (which accounts for 25% of corporate tax receipts) is projected to fall of a cliff which will not only result in massive loss of tax income but will also lead to a falling pound as we have to purchase the lost oil form abroad. The inflation from the falling pound will in turn cause higher public spending to maintain the civil servants and inflation indexes on pensions. Transparency and openness in the UK? High tax, profligate spending, zero personal accounatbility- all traditional qualities of a leftist administraion. Then suddenly eveything goes tits up and it's all the fault of the markets and the only response the governmetn has is to spend even more of our money- really the mind boggles. I've no remit for GB who I've thought to be a disaster as a chancellor for a long while - even when the media were puffing him as the "great chancellor". But this is not a leftist administration - it's a strange right wing / left wing centralist hybrid - (and right wing doesn't mean you never centralise or spend big - you just do it on different things like defence - just as left wing doesn't necessarily mean centralism). But this is an administration which swallowed the Thatcherite "no restraint whatsoever on the markets" ideology hook line and sinker and as a result the financial markets were allowed to get right out of hand. But that doesn't mean the greedy barstewards who took advantage of this shouldn't take a lot of the blame too. And finally, the Tory party were (and are) perfectly happy with PPP and PFI, it fits right into their ideology, though of course they won't be shouting too much about this at present. Labours policy of massive public spending to regenerate demand is profoundly mistaken. The Keynesian multiplier effect depends largely on the propensity to borrow, which in current circumstances is – non-functional. This is what the Japanese discovered in the 1990s when their Keynesian spending program produced very little other than a massive debt headache, though in their case the bug was deflation. Even Keynes himself initially overlooked the fact that these programmes have eventually to be funded – it was only after the war that he realised this, when he had to go cap in hand to Washington and beg for the Marshall Plan. This debt to America was only finally paid off a year or so ago. There will be no Marshall Plan this time. The best example of the multiplier effect in action took place after the 1987 budget, when Nigel Lawson cut taxes dramatically. Perhaps thinking that monetarism had replaced Keynesianism, Lawsons officials told him that his budget would have no inflationary impact. In the sense that the budget itself was monetarily neutral (it was fully funded) they were correct, but they forgot the multiplier effect. As soon as people found the extra, unexpected money in their pockets they used it to pump up their mortgages, thus busting the money supply and causing the inflationary boom. In this respect there is no difference between Keynesianism and monetarism – they are complementary, not alternative. The cutting of interest rates has exactly the same effect on the amount of money in peoples pockets (given that most of us have mortgages – it would be different in Africa), with exactly the same consequences. The mechanics are identical, though where fiscal policy involves tax cuts the effect is rather more immediate than where it involves expenditure increases, due to delays in the circulation of money between buyers and sellers. Gordon Brown has clearly failed to understand this, because from 2001 onwards he made exactly the same mistake. And that guy calls himself an economist?! I can understand Nigel Lawson falling into this trap because he was implementing monetarism (and tax cuts) for the first time. When you are in virgin territory the way is unlit and potholes await. Brown on the other hand had over ten years to try and figure out why inflation took off in the late 1980s, and he still didnt get it. Of course he could claim that he thought that the inflationary consequences of his expenditure boom would be offset by global disinflation and the effects of immigration undermining wages levels in this country, and to a large extent that did indeed happen. But even so, the BoE still had to increase interest rates significantly and persistently from 2002 onwards, which in turn pushed the pound through the roof making it uncompetitive, which in turn undermined economic growth. Everyone is now getting paranoid by whether or not our economy is going into recession, defined as zero economic growth for two successive quarters. This definition is useless. The total growth rate consists of three elements: inflation, population growth, and real increases in per capita standards of living. Personally I would prefer to define a recession when just the last of these turns negative, which it did long before the credit crunch broke. That total growth remained steady at about 3% until around 2006 disguises the fact that inflation and population were growing at the expense of real standards of living. Nor do the figures indicate any benefits deriving from immigration – in fact their principal effect has been to expand demand for public services even faster than Brown could spend money on them. Fiscal policy and monetary policy must therefore be kept in balance. Fiscal policy can be regarded as the ‘rough tuning of demand, set once a year in the budget, and monetary policy the ‘fine tuning- reviewed monthly by the MPC. The externals are debt management from the former, and exchange rate management from the latter. The ideal therefore is a balanced or surplus budget to control inflation and low interest rates to maintain growth through a competitive exchange rate. And that is what John Majors government achieved in the mid 1990s. Brown then went and reversed both policies! David Cameron is of course right to say that, if we are going for a fiscal deficit, then tax cuts will have a much more immediate and potent effect on demand than public spending increases. But even this will be blunted by the continuing unwinding of leverage in bank lending. I am also concerned that these decisions are being taken before there is any sign from the inflation figures that demand is moderating. We are jumping the gun. Who is to say that oil prices wont turn up again, or that an exodus of immigrants wont lead to wage inflation, or that the BoE hasnt overdone refinancing? Trying to second guess the market is how you lose your shirt. It would seem much more sensible to me to restrict the re-stimulation of the It would seem much more sensible to me to restrict the re-stimulation of the economy to monetary policy. For so long as the banks are unwinding at least, the BoE should consider direct lending using the banks as agents, perhaps just for specific products such as first-time mortgages or business loans to begin with. Indeed I would go further and develop monetarism onto a regional basis, setting different base rates for different regions for these products depending on local inflationary conditions. Direct lending would make this possible, and then we really could look forward to ending the north-south divide. We should also re-jig our inflation statistics to include housing but exclude direct imports and interest rates, and we should do that region by region. It is I am sure most likely that inflation will turn down first up North, if it has not already done so, and direct lending would enable us to respond to that much more quickly. Global inflation on the other hand are beyond our control, and in any case import price rises do not strictly speaking constitute monetary inflation. Regional demand management would also enable us to set the MPC a minimum unemployment level as well as a maximum inflation level. Never again must we find ourselves vacuuming up millions of immigrants just because we could not prevent our labour markets from drying up in the South. I have no difficulty with temporary immigration or the principle of free movement, but we should discourage settlement by imposing a moratorium on citizenship and withdrawing entitlement to the personal tax allowance from non-citizens. As for myself I am still feeling chuffed that I blogged the idea of partial bank nationalisation two days before those blokes at Standard Chartered thought of it (see http://www.conservatives.com/News/Blogs/Financial_Crisis.aspx)! Until disabused of this notion I shall assume they saw my blog and ran with it! Actually, the issue of shares is something every accountancy student learns for his exams – what is really intriguing is why Gordon Brown didnt know about it for Northern Rock or B&B?! Re- JohnPoynton above. Well worth reading and provides the reasons why Brown is far from the 'brilliant Chancellor' and the Bernanke et al approach to the current economic situation is so flawed and will most likely create further problems. A right wing article from a right wing Tory. First of all, if finances do not spiral out of control- and quickly- then we will be in a gigantic recession. Remember when the Tories tried to balance the budget in the early 1980s? We are still recovering. Secondly, not all spending is "on the books". So what? This simply brings us into line with the US, France and Germany who also don't put public corporations' debt on the books. Quite sensibly, they believe that if debt is being financed by non- public sources of revenues (ignoring subsidies which are on the books) then it shouldn't be counted. re Article. The mistake that economists also make is not looking at the personal indebtedness of a country as these debts too have to be serviced and paid off. Of course if this debt is sourced by borrowings from overseas then there is a futher complication. The 'carry trade' with Japan looked extremely profitable while exchange rates were constant but to service Yen debt now from Sterling will have become significantly more expensive particularly its repayment. With USD borrowing made cheaper by the FOMC earlier this year, if British banks had borrowed USD they are now looking at an extra c.15% cost within only six months to effect repayment...... With the worst Balance of Trade Deficit per capita in the G-7, the case for borrowing from abroad needs urgent examination or the IMF (once it's solved its internal problems) will be landing at Heathrow- Again...... John Poynton- Er what? "Labours policy of massive public spending to regenerate demand is profoundly mistaken. The Keynesian multiplier effect depends largely on the propensity to borrow, which in current circumstances is – non-functional. This is what the Japanese discovered in the 1990s when their Keynesian spending program produced very little other than a massive debt headache, though in their case the bug was deflation." Your first mistake is in this paragraph- and this probably invalidates the rest. The multiplier depends on the (marginal) propensity to *spend*. This is currently quite high. The Japanese problem was that this kept on decreasing as people saved more. Saving has always been quite high in Japan and the onset of recession encouraged this. I am not panicking because I know that David Cameron and George Osborne have the nous and experience to sort this out for us. Make no mistake, the present pitiful excuse of a Government is on the left, in all its self-loathing, Britain-hating, statist glory. @Tzimisces: shoot the messenger if you like but you will find similar criticisms from the Left. For example, whilst Mayor of London, Ken Livingstone fought hard to block the Treasury from imposing PFI deals on the London Underground to modernise the track. In the end, one of the two deals collapsed, vindicating him. Tzimisces in what way is an NHS trust paying for a hospital "financed by non- public sources of revenues "? Similar the London Underground backed by TfL and a guarantee from HM Treasury? Similar the schools, paid by local authorities, backed by the Sof S for Education? Similar the HM Treasury offices in Westminsterm paid by HM Treasury? Similar the UK army bases, financed by the MoD? I don't really get your point.......please explain Yesterday Gordon Brown even claimed: "Debt is considerably lower than a decade ago". Have we found the WMD yet? Be afraid indeed. But be very afraid at the fact that state pensions aren't on the balance sheet at all. Our Government does not consider them a liability because, although you've been paying for them your entire working life, it believes that it might, at some point in the future, decide to rob you of your entitlement. Therefore the obligation to pay state pensions to an individual only appears once that individual has retired and not before. You can write to NICO if you like and ask for your state pension prediction. They will write back and tell you your current 'entitlement'. But, according to the public accounts, the letter is not worth the paper it's written on. Yes, I know that the Government can, and does, dilute future entitlements - as it did recently by raising the future retirement age in stages to 68, and robbing vast amounts from SERPS/S2P for middle earners. But there is a massive unrecognised constructive liability out there, that the Government simply wants to forget about. @buryboy "experience" that's Brown's patented property! Cameron & Osborne bring "judgement"....as in Rothschild, Deripaska, yacht... MrRanter Oct 21 08, 1:00pm Have we found the WMD yet? In these columns it's usually PM Thatcher...... @nairobiny Oct 21 08, 1:30pm re-State Pensions, SERPS etc.. Wonder what would occur if a large section of the electorate wrote and asked for the transfer value (copy to MPs) ? I don't get the uproar about debt. Debt is wonderful. It allows you to purchase things you otherwise couldn't. It allows you to define yourself through consumption and shopping. It allows you to live for today and have fun. It allows the great consumerist Ponzi scheme to exist. What's not to love? We've running out of future generations to mortgage . Why should they assume these debts? Honour hardly comes into it. Take the PFI: the rate of interest on this debt is higher because, this is not public borrowing. The profits all go to private persons who would be ungrateful dolts if they were not supporters of the politicians who presented them with such tasty business. And the tale continues: examine much of the expenditure for which the debt was incurred and be prepared to be shocked. They are already doomed to inferior educations with curricula drawn up by spivs, broken public services, the hatred of half the world (and the contempt of the rest) for the evil wars we have conducted. In the past those who have inherited great debt have inherited hope for the future with it:. The generation which shouldered the war debt was rewarded with public ownership of industry, the NHS in pristine form, a rapidly expanding and improving education system, Universities better than anywhere else in the world, accessible to more than had ever dreamed before of going to them. All this, Rock and Roll and Tony Hancock took the edge off fears of insolvency and a sneaking suspicion that creditors were collecting pay for the protection they had been afforded during the war. The spectre of repudiation is what should be feared: loans will not be easy to come by if creditors sense that they cannot be repaid and are not unlikely to be, in one way or another, repudiated. This is about the only article of CiF covering finance that is worth reading for its whole-hearted integrity and honesty. Sometimes it just is painful to find out the truth but that doesn't mean we should voluntarily shield ourselves from it - that way ruination lies. Thank you Mr Newmark. If I could rate your contribution I'd give it 5/5. Before entering parliament he was a senior partner at Apollo Management LP, a leading international Private Equity firm And talking of the need for transparency and open books... pinktaco That's right, it's all the lefties and other socialists who've been in charge for the last thirty years. The question is, what will it take for The Right to ever admith they're wrong? Nothing. There's always someone else to blame and a hidden communist hiding under someone's bed, you've just got to keep looking.... The UK's public debt by one estimate may be £76,475 and by another over £96,967 per British household. This tantamounts to more than twice the average annual household income. I do not think I would be too wrong to assume that the debt levels will be almost the same across all the G7 economies. But who have been lending these governments so much money? And what could be any legitimate source of their money in the first place? Would theUK government be honest enough to divulge who the lenders are and the amount each lender lent? Then lawsuits should be brought against all the lenders so they have to disclose in open court the source of their money. The lenders would not be able to justify the source of their money for the simple reason that they can never have more money than created by the entire economy over few years. That is mathematically impossible. If they say fractional reserve ratio as the source of their lending, then UK public should immediately demand unilateral cancelletion of all such public debt because money for such debt could had only been created out of thin air. The lenders have no moral ground to claim anything back from such lending. The governments must be forced to work for the common good of all their citizens and not as agents of immoral and/or criminal banking and financial interests to transfer public wealth to those interests. This is the right time. The lenders do not have two feet to stand now. Recent events have proven beyond any shadow of doubt that all their claim of being enormously wealthy is completely bogus. Let them show the source of their money. Case closed! The Centre for Policy Studies? You mean Thatcher and Keith Joseph's favourite Friedmanite thinktank? The one that was responsible for destroying the industrial base of this country, which meant we had to rely on a bunch of grasping charlatans whose bail-out money is now driving up public debt? That Centre for Policy Studies? PFI started under the Major government. Did the Tories include it in the public debt figures? Did they include the public pension liability? Do other nations include PFI and pension liability on their balance sheets? (serious questions - I'd like to know the answers) Japan's public debt is 180% by the way.Britain's hidden debt
The government must recognise the true scale of public debt and bring in some much-needed transparency
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With New Labour?
I'd love to see it, but no chance.
If the 1.5 trillion of personal debt is added to the State sector the aggregate borrowing and servicing cost is stupendous even though receipients may be residents but not avid spenders..
This need not happen in the UK- particularly if spending is targetted at those most likely to spend rather than save (unemployed/ poorer people)
And, I suspect, future generations are running out of patience.
Why should today's infants and their children work through out their lives to repay a mountain of debt which, whether they choose or not, will blight their existences anyway?
Tuesday, 21 October 2008
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