| Oct. 24th, 2010 @ 02:33 pm The budget |
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Like George, I'm trying to wrap my head around this issue - it's a difficult one to fathom.
On the one hand, we're told that there is a black hole in the UK budget of colossal proportions, enough to sink the country if we're not careful. On the other hand, one of the roles of Government is to protect the population from serious harm - I count preventing another Great Depression as in this category.
I'm going to be frank, the numbers just don't add up. I suspect that this is because of the off-balance sheet accounting of PFI and the recent bank privatisations.
Be prepared for lots of graphs:
The first is a graph of the top 3 budget items in the UK historically from 1980 to the present, normalised to real values to give a fair comparison. It shows a plateaux from 1980 to around 2000, then almost doubling in real terms in the past decade.
This is obviously one of the New Labour policies of expanding the NHS and education sectors, clearly it shows in these above. Note that the defence budget has remained consistent at between £30 and £40 billions - the wars in Iraq and Afghanistan cost roughly around £1 billion/year each.
With a background of "Education, education, education" and an ageing population, we can see these were big policy issues that were clearly concerns to the voters. Indeed, it can be argued that these core issues made New Labour popular.
If we view the graph of national debt, this contrasts with the above. (again, 1980-2010, real terms).
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It's not until the financial crisis hits that we see national debt increase markedly.
This is not the whole story though, the bank bailouts are not included in this, nor are things like PFI.
The real level of UK national debt could be double the above official figures: "at around £1,340 billion, which is 103.5 per cent of GDP".
Of course, debt is not the real problem, the cost of servicing this debt is the real issue. If we go back to the top graph, we can see the cost of the interest payments in grey (uppermost slab). It's comparable in size to the defence budget, in other words £40 billions, give or take.
Forecasts for the off-balance sheet interest payments are around £70 billions/year, which is the size of the Education budget, and dwarfs Scotland's allocation (£28bn). At these levels of debt, the danger of running out of control with the interest payments are clear.
If the economy contracts, more people are likely to become unemployed, which means less revenues, less money in the economy and this can spiral in to an economic depression. The role of the Government in this scenario is (usually) to boost spending, create jobs and inject capital into the economy - one of the key points in Keynsian economics. However, the current Government have taken the opposite view that the budget must be brought into balance quickly, hence the current round of spending cuts.
If course, this implies that the economy will almost certainly contract in the near term, as the budget is reigned in, causing pain to many families. The short term pain, they seem to be arguing, will be better than the long term decline. There have been arguments that the spending cuts are regressive or fair. To be honest, you can argue that either way. As George says, economists and politicians can argue and both be correct. (Sorry, lost the exact post there, George).
I can't help think of parallels in the medical world. Faced with uncertainty and many unknowns, the Doctor must make a choice; balancing the short term and long term viewpoint, ultimately knowing that the intervention may well kill the patient.
My view of the economic situation is that the cuts are deep, but we don't know the specifics yet. In a time where the economy should be injected with capital from the Government, it is being withdrawn, and that can only be described as a risky strategy. Balanced against the risky strategy of escalating costs of interest, which is the riskier? I don't know. We should, in theory, be reimbursed for the bank bailout perhaps with a profit, but that seems a way off now.
Most disappointingly, most parties are not even entertaining the ideas of tax increases - either personal tax or corporate tax. Even less keen are they with imposing a heavier rate of tax on the banks.
On the other hand, that is what the population voted for, and what they seem to be most upset about. Democracy does not make sense sometimes. That seems to handily sum up the situation we find ourselves in.
One thing is clear, the powers that be are not making the reasons behind this recent belt-tightening as clear as they could be. |
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