Monday, 8 December 2014

Boom, Bust, Cuts and Debt - Perception and Reality

There's an unfounded rumour that the current government has been generally good for the economy, but has made deep cuts to government spending. According to this article in the Guardian some 32% of the people asked would trust Cameron and Osborne to run the economy, which puts them neck and neck with the only rational answer to that question - None of them. 

Of course if you compare the coalition with Labour then they're a model of financial responsibility and prudence, but by any other measure they're awful. If you compare their plans with the simple reality that the government is still spending significantly more than it's bringing in and appears politically unable to make significant cuts then it's a looming disaster.

I don't believe that the general public really grasp the scale of the problem, and vote hungry politicians have been in no great hurry to tell them. We're absolutely swimming in debt. We're paying £45 billion, or 3% of GDP just on interest on the debt. That's £750 a year for every man woman and child in the country. It's an appalling waste of resources. The idea that a few "efficiency savings" in public sector bureaucracy combined with 2-3% annual growth can solve our problems is pure fantasy. 

There will always be some level of borrowing for specific infrastructure projects for instance, or to level out spending during a major economic downturn when tax receipts are down and payments up. Routinely borrowing money for current consumption and vanity projects throughout the economic cycle, as Britain has been doing since about 2001, is absolutely nuts on a government level in just the same way as it is nuts for an individual. More so in fact. 

Spending on public services might have fallen a bit, quite significantly even in certain areas, but if you look at government spending as a whole then it's carried on going up throughout the current parliament, both in absolute terms and as a proportion of GDP, and the immense national debt which I highly doubt will ever be repaid is still going up as well.

Based on official figures reproduced here.

Given this huge level of debt and the ever growing cost of servicing it, the only real current objective of any rational government looking beyond it's own immediate popularity should be to reduce and as far as practical eliminate "public" debt and put an end to the current ridiculous situation whereby we are essentially taxing the productive economy to service our enormous debt and simultaneously adding to that debt with excessive spending. No country serious about reducing it's debt would be even contemplating something like HS2, let alone the grand festival of waste that has been our military adventures in the middle east in recent years.

The other aspect that we need to do better on is actual growth. First of all we have to be honest with ourselves that we've been under-performing economically for decades. Depending on the measure you use our GDP per capita is about 90% that of France, the apparent sick man of Europe, and much further behind that of other comparable economies like Germany or Australia. And it's roughly 2/3rds that of the United States. I know there are limitations on GDP as an accurate measure of a country's prosperity but discrepancies of this magnitude tell us something. Britain is currently more comparable with Israel or Spain than with Sweden or Canada.

In the so called "boom" years before 2008, growth was hovering around 2-3% which is healthy for a highly developed economy, but if we were serious about catching up to the levels of the countries I (and I believe most people in the UK) feel we should be judging ourselves against, then we need more. 

There is no magic bullet for growth, but there are a few things that would make sense: 

Much more aggressive cuts to public spending that would allow meaningful tax breaks in future. 
  • A serious reduction in fuel duty and scrapping of the associated climate change nonsense which strangles economic growth. 
  • A real bonfire of planning restrictions that would permit more development and hopefully pop once and for all the perpetual house price bubble that leads us to the insane situation whereby most people quite rationally aspire to be saddled with huge debts for most of their working lives and end up with a fantastic amount of money tied up in a modest house. 
  • A genuinely stable monetary policy that doesn't revolve around hiding inflation. 
The alternative, which we appear to be taking by default, is a continued decline through the ranks of mediocrity to total irrelevance, and the savage stupidity that goes with it. I think there are people in Britain who genuinely want this, and think some sort of moral salvation will come from being poor. I will expand on this weird line of thought in a future article but for now it suffices to say I'm not one of them.

For those of us who actually want a successful country, Britain is in a hole that will take a few decades of hard work to get out of, but remains bent on solutions that will look good on this evenings news and make us feel better. I'm not of the "benign dictator" school I've sometimes occasionally heard discussed. I can see their point, but we have enough hallmarks of a silly, third world country as it is.  What's needed first and foremost is a strong political and public will to actually get on top of the situation, and an acceptance that it will take a few years of paying down debt before we can spend money on nice things. None of the political parties have shown anything of the sort.