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Start at about 1 hour five minutes.
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The 56.8% National Debt to GDP ratio is a joke. First of all the basis of the ratio is misleading as a measure of financial health at a time that a country is running a large deficit. If I go to a bank for a loan they measure the value of the loan against my income, not against the value of goods that I will purchase in the year after drawing the loan. Net Debt:GDP is a fair measure when net changes in borrowing are relatively small they distort the rankings. A better measure would be Net Debt:(GDP-budget deficit). the 56.8% figure implies £1409bn GDP on £800bn debt. The national debt 12 months previously was only £627 bn, so that implies a deficit of around £175bn, so a better ratio for the UK would be 800/(1409-175) which is about 65%.
But then there are quite a few liabilities that the Government leaves out of the national accounts. First amongst these are the PFI liabilities, which are on the books of the relevant departments but put off balance sheet by the treasury. There are about £45 bn of completed contracts, but another £15 bn or so of commitments (mostly MOD tankers and A400M military lift), so lets call that £60 bn. Then there is the mysterious £20 bn that the government manages to avoid putting on the books by the simple expedient of calling it a not-for-profit company, and having it borrow in it’s own name, albeit with a government guarantee. Why that is not on the books is a mystery known only to this government. Then we have an estimated present value of nuclear decommissioning costs of £70 bn and many more odds and sods that any public company would show as a liability or reserve against. But biggest of all is the public sector pension liabilities that are just ignored. In other countries these liabilities are usually funded, albeit often with Treasury stock. By making contributions to a Federal employees pension fund which then purchases Treasury stock, the US government still has the same amount of cash, but it records the pension liability as part of the US National Debt, whereas the UK government simply sticks its head in the sand.
Lets call the UK civil service pension liabilities £900 billion, although I have heard higher figures. That gives a more honest figure of (800+60+20+70+900)/(1409-175) which is about 148%.
Add in another three years borrowing at today’s level of £175 bn and the UK hits somewhere around 193%, which puts us into first place.
I have listened to your talk with a mixture of agreement and deep worry. Inflation is no good idea. Savings are credit that the savers give to the community at large. Inflation destroys that credit, effectively by robbing savers of the purchasing power of their savings. Have can you justify such a thing? It is fundamentally immoral and is immensely destructive to the cohesion of society. It is not true to say that deflation discourages spending. All sorts of things eg electronic goods, have gone down in price over the years but it has not stopped people from buying them. And people still need to purchase goods for their daily need.
Your figures for the cost of £23000 to the government if someone earning £25000 a year becomes unemployed is a demonstration of the extent of the churning that takes place as a result of the operation of the tax system.
Thatcherism is wrong in that there is indeed no necessity for a country to live within its means in the short term. Keynes is right to the extent that governments should run into debt at periods of recession, but it should not be spent on keeping people out of work, where their skills rot and they may get out of the habits and routines of working. This debt should be used to absorb spare capacity in the economy, and not on make-work project either.
Prudent budgeting should use debt for that which enhances the country’s wealth-creating capacity, not to pay people to stay unwillingly or otherwise, at home. It shouldn’t really be spent on repairs and renewals. But given the atrocious state and inadequacy of the UK’s infrastructure, the debt should be spent on national housekeeping. Recession is a time of opportunity to carry all sorts of works which have been deferred.
It has been said that this is impracticable due to the long lead time of major infrastructure projects, but there are many small projects that could commence quickly, including the huge backlog of repairs to the highways, schools, hospitals, etc, and some major ones too, on which substantial amounts have been spent already and could be quickly put out to tender. Network Rail alone has a long wish list that could be brought forward and start almost immediately. This generates real wealth-creating capacity and is consequently not inflationary.
In this connection, it is worth noting that Sweden has a massive ongoing infrastructure programme, part was announced 12 months ago and a further tranche last week. I think the Swedish government is daft not to collect much of the land value that all this infrastructure generates but that is a different matter.
Henry
Inflation at 3% makes the world go round
Deflation stops it
I want rotation
And what have you got against supporting those out of work and noting that they don’t pay much tax as a consequence – which is all my calculation notes?
But I agree re infrastrcuture – we can do it now – and should. Cash is available – banks can lend it
Richard
To state the obvious, money is merely a medium of exchange. It enables claims on wealth to be deferred or transferred from one place to another. If its value is steadily decreasing, money becomes dysfunctional. It also discourages thrift, promotes profligate personal habits, waste, spendthrift attitudes, extravagance, getting into debt, irresponsibility, and failure to consider the consequences of one’s actions. It contributes towards a generalised moral breakdown in society, because people who behave responsibly find their claims on wealth shrinking in front of their eyes. It is bad for the planet.
Even an inflation rate of 3% means that that money has lost half its value in 25 years. So what is the point of providing for one’s future eg retirement?
When I was at school in the early 1950s, we were encouraged to buy 15/- National Savings Certificates. That would buy two day return tickets from London to Brighton so it was worth about £50. The same amount now will not even get you on a bus. Swindle is the word that comes to mind.
Not having read Keynes I know him only at second hand but I understand that it was his notion, which you restate, that the economy will come to a standstill if the purchasing power of money is not steadily falling. Put another away, if people who chose to be prudent are not systematically defrauded by a process of fiscal jiggery-pokers, the economy will cease to function. This is indeed a strange proposition. I am aware that Keynes, who was a mathematician, underpinned his theory with pages of formulae, but it does sound has if this sophisticated mathematics could be grounded on some dodgy assumptions if that is the conclusion arrived at.
I have nothing against supporting those out of work. But most people who are out of work would rather be working and earning a proper livelihood. What your figures show is how much of the cost of employment is money that ends up in the government’s coffers. When the employees are actually working in the public sector, this is just churning. Local authorities, the NHS, etc receive between half and all of of their income direct from central government. Nearly half of their outgoings are paid back to central government in the shape of PAYE Income Tax, and Employers’ and Employees’ NI contributions. That is churning. It would make no difference if public sector employees were paid their wages net and given tax credits instead. It would show that the net cost of running public services is little more than half the headline figure. It would also mean that the public sector would be spared the not inconsiderable expense of dealing with staff PAYE and NI.
Because the tax system almost doubles the cost of employing people, then the least skilled are likely not to get employed and some tasks will simply not get done, especially labour intensive ones like care work, cleaning and repairing. Ir is dyfunctional, wicked and immoral to treat people in this way.
Henry
Like quite a number who comment here you clearly liv in a world of make believe
That’s fun for theorists, and of no practical use
Face reality: deflation destroys well being. No one can guarantee stable cash. So low inflation is the safest option.
Debate over.
Richard
PS Keynes was just about the least mathematical of economists – go read
Of course no one can guarantee that money maintains its purchasing power, but to deliberately reduce it over time as a matter of public policy is nothing other than deliberate robbery of savings. It is the unmentioned pensions scandal. That creates not well-being but constant anxiety.
The whole concept of demand management is bogus. If people cannot produce then they have nothing to offer in the market place, thereby creating the shortage of demand.
Difficulties in obtaining premises or obtaining larger premises, was reported as the main obstacle to expansion in London. It’s restricted supply of land again that is the blockage in production. What did Keynes say about land? Nothing, as far I can tell. Yet it is one of the two primary factors of product. What kind of economics is it that ignores land? It is easily done. Like humans ignore air and fish ignore water.
Henry
Ever tried looking at the big picture?
However important land is – there’s more to life than that
Sorry – but that’s the reality
You really can’t answer all questions with one answer
And nothing you say will convince the other 99.999% of us that’s the case
If you were a touch more open minded it would really help your case
Richard
OK, Richard, it’s a deal. Lend me 100k and I will deposit it in a 1 year bond. They pay about 4%. I keep 3k, you pay the tax and get the money back next year. Would you be happy even if there was no inflation?
Thinking of it that way, it may be that inflation is a sort of natural process whereby the effects of usury are negated, in which case the real problem with money is the taking of interest on loans. But there has to be something wrong with deliberately reducing the purchasing power of money.
“Inflation at 3% makes the world go round. Deflation stops it”
“Henry. Ever tried looking at the big picture? However important land is – there’s more to life than that.”
Richard, you seem to be criticising Henry for doing something you’ve done to an even greater extent.
The perceived problem with deflation is that it encourages the hoarding of cash and the deferal of spending until the last possible minute. Whether the effect is a great or as undesirable as implied is open for debate, but you seem to be taking the position that deflation would cause the world to grind to a halt.
Now, Henry’s position seems to assume a somewhat similar premise with regard to land – i.e. that if the value of a land title absorbs all the increase in location values, land will steadily increase in value and become a target for hoarding, which then reduces the amount being spent on production.
The difference seems to be that Henry is claiming that an increase in the relative value of land creates bad effects, whereas you seem to be claiming that an increase in the relative value of cash creates catastrophic effects.
I have been pondering this business of inflation some more. For many years the interest rate was stable at around 3%. And as a general observation, it seems that interest closely tracks inflation. But what if it was the other way round – that inflation is actually tracking the interest rate? After all there is no a priori reason why people should be paid money for lending money. Interest is not a payment for risk. Anyone actually charging for risk would do it differently and they would not need collateral.
All the major world religions have condemned usury. Could it be that they are right to do so? Could it be that inflation is the adjustment that has to be made in the economy in order to neutralise the effect of interest?
1. When you said the debt is owed to banks, pension funds, and people – i would like to know more about which banks and which people, where could I find this out ?
2. I’m struggling with the ‘paying £24bn interest per year is OK’ why is it better for government to borrow money rather than just create it ?
3. Is inflation accurately measured ? I mean if food, petrol, gas, electricity and council tax all go up about 5-10% how can inflation be 3%?
4. When you compare national debt now to debt many years ago perhaps you should remember that the nation owned more assets then – like utilities , raiways, housing , property etc .
thanks