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Deficit reduction
Nov. 9th, 2010 02:18 amJust a quick economics post, while this is fresh on my mind. I'm going to try and stop commenting so much on political issues but I get sad when I think that people don't understand the situation and blame things on the wrong culprits.
I know a lot of people are unhappy at the Government cutting public spending so sharply. It is going to cause a lot of hardship. But I don't think everybody realises that there really is no real choice here. Public spending was simply too high, and had to come down sooner rather than later.
Governments borrow extra money, spend it to drive growth, and that growth then means the country is doing better in terms of jobs and industry. Credit, when used responsibly in ways like this, is a good thing. It takes the cash sitting dormant in rich people's bank accounts and uses it to make work for the less rich people, which generates funds to pay those people's wages and to repay the creditors with interest. No problem. It works well when you have good reason to believe that the economy will be booming soon and you'll be able to make the repayments.
But you have to be able to make them. Labour governments borrowed heavily in the 70s when Britain was collapsing and the Conservatives paid it off with painful but necessary cuts in the 80s, eliminating the deficit to reduce the debt. It worked the other way around when the Conservatives borrowed heavily in the 90s to deal with the recession and then Tony Blair's Labour government again was able to eliminate the deficit so that debt could be reduced. Past governments knew the loans had to be repaid.
But why, you may ask? Why can we not just keep borrowing, to avoid cutting public services and drive growth, until we're making enough extra taxes to cover it?
Is that so bad? We could just opt to go bankrupt and then pick up the pieces. But that incurs its own problems. By far the most significant one is that we won't be able to borrow any more money, and instead have to just spend what we actually have instead. This means that instead of the current Government's £81bn cut spread over 4 years as the borrowing is ramped down, there would be an instant cut of about £150bn in one year as the money we were going to borrow to make up the shortfall between tax income and planned expenditure simply isn't there any more. Think about it.
Can't we just tax 'the rich' instead? No, and the reason for this is quite simple - big businesses and top earners are very mobile and don't have to stay in this country. If you tax too heavily, they move their business to other shores and instead of getting increased tax revenues you get decreased ones, plus job losses resulting from business moving overseas. (I'd also say It's somewhat unfair to keep increasing public spending in good times and taxation in bad times - at what point do you accept that the needle should swing back the other way? However, this is largely irrelevant here due to practical reasons.)
It's important to realise that the cuts are not just a Tory thing! It's easy to write this off as an ideological attack on the state but ultimately it's the economics that make this essential. Massive cuts are the order of the day in Greece (ruled by the Panhellenic Socialist Movement), Portugal (governed by the Partido Socialista), Spain (ruled by Partido Socialista Obrero Español), Ireland (governed by Fianna Fáil, a centrist party). Similar situations exist in Iceland and Slovenia too. These aren't governments that inherently want to slash the state. They just know that they have no choice. It is certainly unfair that the average worker in the public sector should have to pay for this with their job, but countries like ours and the ones above are in a position where this cannot be helped. Either a large number of public sector workers lose their jobs now, or a significantly larger number will lose them further down the line. It doesn't help that the public sector is a less efficient way to spend a country's money, and that is where there will always be conflict between Left and Right.
Some talk about how we should keep spending, to drive growth and thus increase taxes and clear the debt later. But this buys into the myth of permanent growth, the myth the bankers were selling us 2 years ago, but which the government should not have lapped up. It wasn't true then and it's not true now - growth is not a given and you can't rely on it, especially not when the cost of funding it is growing exponentially in the form of interest repayments. We're at the point where the amount of growth we need exceeds the amount of extra borrowing we can do. The only viable alternative is to change course and cut costs instead.
To those of you facing job losses or funding cuts or other hardship as a result of this; I can understand it's really unfair and you're being punished for something that wasn't your fault. :( But I really don't see how it could be any different under Labour or any other government at this point. Debt is a dangerous trap to end up in.
I know a lot of people are unhappy at the Government cutting public spending so sharply. It is going to cause a lot of hardship. But I don't think everybody realises that there really is no real choice here. Public spending was simply too high, and had to come down sooner rather than later.
Governments borrow extra money, spend it to drive growth, and that growth then means the country is doing better in terms of jobs and industry. Credit, when used responsibly in ways like this, is a good thing. It takes the cash sitting dormant in rich people's bank accounts and uses it to make work for the less rich people, which generates funds to pay those people's wages and to repay the creditors with interest. No problem. It works well when you have good reason to believe that the economy will be booming soon and you'll be able to make the repayments.
But you have to be able to make them. Labour governments borrowed heavily in the 70s when Britain was collapsing and the Conservatives paid it off with painful but necessary cuts in the 80s, eliminating the deficit to reduce the debt. It worked the other way around when the Conservatives borrowed heavily in the 90s to deal with the recession and then Tony Blair's Labour government again was able to eliminate the deficit so that debt could be reduced. Past governments knew the loans had to be repaid.
But why, you may ask? Why can we not just keep borrowing, to avoid cutting public services and drive growth, until we're making enough extra taxes to cover it?
- Debt costs money. All borrowing incurs interest payments. Each year we have a deficit, the debt rises. And that means our interest payments rise. That's money that is lost to us, not spent on services or employment.
- Continued negative cashflow makes lenders believe we risk defaulting on the debt. After all, eventually the repayments will be too high and we'd need even more money. Lenders manage risks like this via their interest rates, giving higher rates to the riskier borrowers. So if we continue to show to the world that we require more money than we actually have, our repayments grow even faster as they will charge us more and more for giving us that extra money, if they choose to continue to give it at all.
Is that so bad? We could just opt to go bankrupt and then pick up the pieces. But that incurs its own problems. By far the most significant one is that we won't be able to borrow any more money, and instead have to just spend what we actually have instead. This means that instead of the current Government's £81bn cut spread over 4 years as the borrowing is ramped down, there would be an instant cut of about £150bn in one year as the money we were going to borrow to make up the shortfall between tax income and planned expenditure simply isn't there any more. Think about it.
Can't we just tax 'the rich' instead? No, and the reason for this is quite simple - big businesses and top earners are very mobile and don't have to stay in this country. If you tax too heavily, they move their business to other shores and instead of getting increased tax revenues you get decreased ones, plus job losses resulting from business moving overseas. (I'd also say It's somewhat unfair to keep increasing public spending in good times and taxation in bad times - at what point do you accept that the needle should swing back the other way? However, this is largely irrelevant here due to practical reasons.)
It's important to realise that the cuts are not just a Tory thing! It's easy to write this off as an ideological attack on the state but ultimately it's the economics that make this essential. Massive cuts are the order of the day in Greece (ruled by the Panhellenic Socialist Movement), Portugal (governed by the Partido Socialista), Spain (ruled by Partido Socialista Obrero Español), Ireland (governed by Fianna Fáil, a centrist party). Similar situations exist in Iceland and Slovenia too. These aren't governments that inherently want to slash the state. They just know that they have no choice. It is certainly unfair that the average worker in the public sector should have to pay for this with their job, but countries like ours and the ones above are in a position where this cannot be helped. Either a large number of public sector workers lose their jobs now, or a significantly larger number will lose them further down the line. It doesn't help that the public sector is a less efficient way to spend a country's money, and that is where there will always be conflict between Left and Right.
Some talk about how we should keep spending, to drive growth and thus increase taxes and clear the debt later. But this buys into the myth of permanent growth, the myth the bankers were selling us 2 years ago, but which the government should not have lapped up. It wasn't true then and it's not true now - growth is not a given and you can't rely on it, especially not when the cost of funding it is growing exponentially in the form of interest repayments. We're at the point where the amount of growth we need exceeds the amount of extra borrowing we can do. The only viable alternative is to change course and cut costs instead.
To those of you facing job losses or funding cuts or other hardship as a result of this; I can understand it's really unfair and you're being punished for something that wasn't your fault. :( But I really don't see how it could be any different under Labour or any other government at this point. Debt is a dangerous trap to end up in.
