Following on from last week, where are we with the almost unknowable or understandable £3 trillion of National Debt we have built up ?
Jacob Reese-Mogg recently produced an excellent video explaining quite how bad this was. The real problem is that our National Debt will go on increasing as long as our expenditure is higher than our notional growth. At the moment that growth (including inflation) is around 4% of GDP but our expenditure is about 5%. You don’t have to be a Nobel prize Winner in Mathematics to see that isn’t going to end well. Not only that, but lenders require a higher premium (interest rate) to compensate them for an effective loss in value. The present wisdom is that “debt markets are on fire.”
As Jacob explains, it really is National debt – as in underwritten by all of us. Back in the 17th Century, French debt was still the King’s debt whilst ours was the National debt. As a result, Britain was able to borrow much more cheaply than France. Borrowing was against the future earnings of the nation, paid back by taxation on those earnings.
The real problem is that between the 2008 financial crisis and Covid, our debt has expanded exponentially. But measures put in place then have not been sanitized or scaled back and therefore the whole system is out of kilter. I hate to tell you but as long ago as Seneca in Greece it was recognised that over-expenditure could only go on for so long and that there comes a day of reckoning. For the UK that came in 1976 when there were what would now be called draconian cuts made to staunch the haemorrhage that was government expenditure at that time. That was when the IMF was called in and imposed restrictions on the UK Government.
As it stands 38% or so of GDP is collected as tax. Expenditure is between 43 and 44% which has to be covered by borrowing. As older debt is rolled over, the lower interest rates pertaining from some years ago are being replaced by the higher rates that exist now and as a result the interest being paid to service those debts is climbing all the time. Without a serious rethink on much of what is given away, we will quite literally go bankrupt.
There is another way. Maurice Saatchi has written a great article in the Telegraph (I know, I know) where he makes the case for that other way. It sounds counterintuitive but I promise you, on my word as an Economist, that it would work.
At the moment all lower paid people have tax taken off them every week. Then they are able to make a claim for benefits. There has to be a veritable army of civil servants to oversee that. So why not raise the level at which people start to pay tax in such a way that they don’t require benefits? Perceived wisdom at the moment is that you don’t need to work because you can claim enough. You could get rid of an entire strata of paper shufflers, reducing expenditure as well!!.
At the other end of the scale, to everyone’s astonishment (no, not really), people go out of their way to NOT pay extra tax. Even going so far as to turn down promotions and increased pay. People are disillusioned because if they earn more, they simply lose it to higher taxes. If that top rate of tax was cut, they would instead take the extra pay and promotion and potentially start their own businesses and prosper. In case you prefer to pretend otherwise, cutting top tax rates INCREASES the amount of tax collected, a fact which has been demonstrated time and time again. The Laffer curve “rools.” Scotland’s so-called government has learnt the lesson in the hardest and most brutal way possible. From spite, jealousy and moronic ideology, they raised the top rate of tax from the UK wide 45% to 48%. With exquisite Karma, the amount raised by the highest rate did not go up (remember Laffer?) – it has gone DOWN to the tune of £28million this year and almost certainly much more in future years. Very quickly real growth would return to the economy and as everyone knows (but sadly not our present government) to make people better off, make a bigger cake so they can get a bigger slice.
Moving on from my mention of liquidity in terms of the banks and the economy, do you spot what giving people more to spend for themselves is? It is increased liquidity that fuels growth. I do not understand how and why the present Government fails utterly to grasp this incredibly simple fact. Indeed, they go further, doing their very best to strangle liquidity at every turn by hiking taxes and creating new ones.
The economy of course is governed not by a single diktat but by the decisions of millions of individuals. Their individual decisions are tested against competition and efficacy. Those that fail are left aside. In a state-run system that doesn’t happen. The inefficiencies forced through lack of competition merely compound. Individuals – surprise surprise – don’t accumulate savings in order to hand them over to others. They take the risks needed to enjoy the fruits of their labour for themselves, and to give themselves a better life and future. When their work results in no improvements for themselves, why would they bother? This is where we are in the UK. There is literally no incentive for anyone to try hard. Indeed, the way things are set up it is better to flout the law. I’m willing to bet that everyone on here has paid for a “wee job” in cash and hence saved at the very least the VAT. Our black economy is absolutely massive, and why wouldn’t it be?
True growth requires the government to get out of the way and let those individuals make their myriad decisions.
Milton Friedman – arguably the most successful economist ever – is lambasted for having supported Pinochet in the mid to late 1970’s. His advice to him was a rapid and drastic cut in government spending and monetary growth to stabilise inflation. It worked. Chile is now effectively the richest country in Latin America with an outstanding pension regime and healthcare (from which we could learn much). Arguably, his advice helped the country back towards democracy. And another country is undergoing Friedman’s medicine in the shape of Argentina. It is still early days but the improvements in what was a basket case are both real and astonishing.
His main argument though was that businesses must do their best to increase profits, because that is where investment and growth come from. People must be allowed to do what they will with that profit, which translates into a virtuous upward cycle.
I do hope you all noticed the common thread here. Increasing liquidity in all its shapes and forms (reduce taxes, reduce governmental crowding out of expenditure etc etc) is the key to growth. Keep your fingers crossed that somebody somewhere in the UK will get it eventually.
