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Thursday, 10 June 2010


In our general election it became axiomatic that the state of the economy and public sector finances were one and the same. It was surely curious that parties, media and it seemed the general voters did not have stomach for debating the financial crisis, recession and world economy. This would have suited the Labour Party, but the political rhetoric could not stretch to these matters to make them party political, although the Conservatives did their very best to blame it all on Labour, and the Liberal Democrats were happy to plant their flags somewhere inbetween but not shy away from bemoaning the state of public finances, which was essentially the Conservative agenda.
It is poetic justice that labour is ousted from power by the same accusations it levelled at the Conservatives in 1989, live by the sword, die... etc. Many people are understandably cynical and see whatever government does as at best oil on troubled waters and likely failure to stem the pollution a la BP. Now that the dust has settled and we have a coalition in government, which is I think a positive outcome insofar as it was long overdue for the Liberal democrats to be blooded with power in central government. I doubt I will see a Labour Government in power again during my working life and I will not be surprised never to see one party with an overall majority in power again in my lifetime. That is nothing compared to the generations some wags speculate it will take to undo the financial consequences of recent years as if it will impoverish all innocents unbearably.The general public is full to brimming with anxieties showered on them by election politics. Central to this is their grappling with what national debt and budget deficits actually are. Decades of refinement to determine what is in or out of the numbers, what is consolidated off balance sheet, what is in the Maastricht Criteria or not, and so on have not made it easy even for experienced economists to be "absolutely clear" as politicians like to say when presaging their fuzzy remarks.
What the politicians say is not cast-iron clear and what they actually know for certain to believe we cannot be sure.
Politics is myth-making as well as reality-checking. Some of it is long term ideology, some short term so-called "hard choices" that appear counter-intuitive to what parties are supposed to stand for.
To take a few examples of what everyone, or the great majority, have been led to believe as essential facts:
- government is half of the economy and employs over half of those in jobs, a view gained from wrongly describing all of the government budget as a % of national income
- government is under 25% of the economy and employs 20% of people with jobs including many who are not full-time but merely part-time jobs
- the fast-growing national debt is an egregious burden on future generations
- that is hard to prove rhetoric; easier to prove the opposite, to show that borrowing is more productive and less of a burden than taxes, and far less than private sector debt, and easiest to argue, technically, the burden on 'future generations' will be imperceptible to them, if a view that most would deem politically too benign to be creditable
- government borrowing is unsustainable, added to which the government has vowed to eliminate the 'structural deficit' that is the bulk of borrowing that is not caused by the effect of recession causing tax revenues to fall below trend
- truth it that eliminating all government borrowing is unsustainable because banks, insurers, pension and life funds and other long term investors need a steady supply as a matter of law as well as prudence, and government needs to make long term investment that should not be entirely a burden to current years' taxpayers
- government is too big / national debt is £14,000 per man, woman and child and growing to £22,000 / if we shrink government and get debt and borrowing down or eliminated then everyone is better off etc.- no, a third of the national debt is owed by government to itself and could actually be cancelled by government fiat, and government has nearly as much again as the national debt in financial assets, but anyway private sector debt at £66,000 per man, woman and child should be considered a more compelling matter, not counting £120,000 owed to foreigners per UK man, woman and child by UK banks. These are silly ratios because in each case banks foreign balance sheets, the domestic private sector and the government all have balancing assets, liquid and property that more than balance the books. Why therefore, except for political reasons, are we so centrally obsessed by government finance; there is more to the state of the economy than that.
- everything government spends and taxes is our money and we (taxpayers) own the debt and deficit
- no, nearly 30% (28%)of tax revenue is taxation exerted on government spending; it is actually not possible to draw lines between private/public and taxpayers/ government to define our economy as if government is made less then private and the whole economy will be worth more; government is not outside our economy or on another planet!
- if we technically could have netted the buying in by government of government debt and counted the value of public enterprise balances and shareholdings bought in the banks out of fees for asset swaps there would have been zero net borrowing by government in the last two years - years when gross government borrowing was trumpeted as the highest ever in history etc.!
- government spending has to be cut urgently and front line services may not be immune, and we will all feel the effects of government spending cuts!
- no, we won't all feel it, and much of it happens anyway, and there are big items that can be cut or encashed without any obvious pain to the general public; life does not always have to progress through 'hard choices'!
What are these items? There are typically £15bn a year efficiency savings not counting all kinds of savings here to spend more there that is regularly part of all departments, agencies, services and enterprises, £20bn asset sales, £15bn public enterprise profits, and not forgetting £45bn in bank shares and many £billions in profits from asset swaps and charges to the banks, offset by benign factors such as steady growth in national savings premium bonds, cash in circulation, foreign currency reserves, and much else.
Compared alone to banks that are selling assets and cost-cutting and needing to re-borrow £hundreds of billions, plus other private sector recycling of borrowings, the government's accounts and financial balances are in reality much less worrisome.
The financial markets don't know any more about all this than others, but like politicians it is there job to stir the pot and test opportunities to trade on uncertainty as they have been doing very successfully with Greece and other 'sovereign debt' politics shaking the Euro. But, this was predictable because it always happens after recessions when governments have to shoulder the burdens of economic recovery.
Does it matter if government cuts spending sooner than later. yes, maybe, but only because the differences are very small and fragile between national income growth rates subject to the intricacies of how these are estimated, and defined for accounting purposes, and need to be just enough to at least bolster confidence compared to slightly lower rates of growth where all can appear doom and gloom. Recovery is both real and psychological, about confidence for the near term future as much as about actual cash-flow and debt management.
Government is steering a political path between the psychology of recovery and its economic underpinnings. They have to talk the talk but may not need really to walk the walk, not all the way. We can bemoan the duplicity of politics and politicians but thank god for them too otherwise who is there to control the panic?

1 comment:

Anonymous said...

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