DEBT AND DEFICITS

There is a great deal of confusion spoken and published in the media in respect of the national debt and deficit. Apparently only about 10% of the population clearly understand the difference between debt and deficit although the matter is at the very heart of understanding our present financial situation.

There is a fundamental difference between cutting debt and cutting the deficit and I do wonder whether some professional commentators as well as some politicians purposefully add to the confusion.  I will try in the next few paragraphs to set out clearly the difference between debt and deficit and hopefully by doing this it will become clear why understanding the difference is important.

Let's start with deficit.  All governments have income and expenditure.  The income will come from the various taxestheyt raise and collect - income tax, VAT, stamp duty, national insurance etc.  The expenditure is the outgoings on benefits and welfare, schools and hospitals, defence etc.  If a government's annual incomings and outgoings are equal then they are in balance, whereas if the incomings are greater than the outgoings then they are in surplus, or, if outgoings are greater than incomings then they are said to be in deficit.

Most countries plan to run their affairs at a modest deficit, so unlike an individual household who might sensibly try not to spend more than they receive as income, governments start with the intention to spend more than bring in.  This deficit has be financed by borrowing.  Governments borrow by issuing government bonds and pay interest on these loans.  If deficits continue year after year, these borrowings grow. The interest that is paid out on these bonds is another outgoing and in the case of governments who borrow a lot, these interest payments can be a significant level and have to keep being paid, year after year.

In the paragraph above, I used the phrase "a modest deficit" and this is generally around 2% to 3%.  So if income is £100 and expenditure is £103 that deficit of £3 is 3/100 or 3%.  As there is always the opportunity to increase tax rates slightly these modest deficits don't seem particularly scary and hence governments can find lenders who are willing to lend to them. Deficits can be reduced by increasing income (raising taxes) or decreasing outgoings (cutting spending), or a combination of the two.

So why all the fuss about deficits and debt?  Well in recent times governments of most developed countries (US, UK, and many in western Europe) have increased their annual deficits so they are now far from modest. Deficits rates (percentages) have grown to be 10% or more.

The deficits are financed by borrowing.  Just like for an individual, a government who borrows is getting into debt. Debt is defined as the size (amount) outstanding. If a government runs it finances in deficit then the amount it is borrowing - its debt - continues to grow.

So what about all these "savage cuts" that the unions and Labour (and disgracefully the BBC and left-wing newspapers) talk about on a virtually daily basis?  Aren't these just efforts to reduce our debt levels?  The answer sadly is NO!  All the "savage cuts" made to date by the Coalition Government (aka the Evil Tories aided by the LibDems) are merely well-meaning attempts to reduce the deficit.  Attempts to reduce our levels of expenditure but only to the extent that the deficit of outgoings less income narrows but is still run at a deficit.  And by any rational or objective analysis all the cuts to date have been modest.  In fact the government (apparently at the insistence of the LibDems) increased welfare and benefit payments last April by 5.2% so increasing this major expenditure when incomes (and hence income taxes) hardly changed year-on-year.  So as a nation we have had to borrow more to increase our benefit payments.  Total lunacy!

As things stand, our annual deficit which is presently running well in excess of £100billion a year will only reduce to £95billion a year by 2016.  Each year we will continue to run high annual deficits which will continue to add, year after year, to our borrowings - pushing up our high levels of debt to a yet greater and greater level.  By 2016 we will owe as a country over £1.5trillion.  This is several times more than our debt in 1997 when Labour took over running the country for the following 13 years. And running it in such a reckless fashion so that by 2010 a note was left in the Treasury to the incoming Conservative/LibDem coalition saying "sorry there is no money left".  Even then, they couldn't tell the whole truth - what they did in fact leave was an enormous debt level and a welfare and benefits system out of control thus creating further large annual deficits going forward.

Hopefully you are still with me. Its easy just to close your eyes, cover your ears, start humming and hope this awful problem will just go away. If you've got this far then next time you hear a union leader or Labour politician (or their BBC mouthpiece) talk about the cuts as something done by a nasty "evil" government you will realise that these cuts are a neccessary and vital part of getting our out-of-control national finances back, if not into some semblance of balance, at least some first steps towards that goal.

We are leaving our children and grand-children a truly appalling level of debt. Collectively we should all feel ashamed although only that relatively small percentage of the population who voted for, and continue to support Labour are the truly guilty.  Because of their actions our children will have to continue servicing the debt (paying the interest) with high taxes and thus a lower standard of living (reduced house ownership and pension provision) than ourselves.

Glossary:
Deficit - excess of expenditure over income (ie. an annual measure)
Debt - amount of borrowings outstanding (ie. at any one point in time)
Reducing the deficit - reducing the gap between expenditure outgoings and income BUT still running at a deficit and therefore still increasing the level of debt
Eliminating the deficit - bringing annual expenditure levels back into line with annual incomings but still the level of debt doesn't decrease.
Reducing debt levels - can only be done by running the nation's finances in annual surplus which frankly is politically impossible given the size of the public sector.

HOW MUCH DO THE LIBDEMS WANT FROM YOU?

There's quite a lot of talk from the LibDems about a wealth tax over these last few weeks.  That would need people to sit down each year and work out the value of all their assets to which a percentage tax would then be applied to the total.  Not easy for the taxman to audit - will he come round to check if money is being kept under the mattress?  So a few days after raising that stupidity there appears to have been a shift in emphasis.  In today's newspaper the direction seems to have changed to 'just' a new property tax.  To quote directly from the paper "Some Lib Dems are pushing for the annual charge to be levied at as much as 1.5 per cent of the property's value". 

That's an easy tax for anyone to work out - just get an estate agent to value the house then multiply the result by 1.5%.  "A house worth £200,000? - that'll be £3,000 in tax please!"  Maybe they'll let you pay it in monthly installments at £250 to make it easy for you.  Well easy if you have a spare £250 a month to add to your existing tax bill (income tax, national insurance, VAT, petrol duties, road fund licence, the charge to watch the BBC etc. etc.).

How many of you out there are cheering on the Lib Dems for suggesting this new tax?  I mean be fair, don't we need more tax revenues because the only alternative would be to reduce our public spending?  It's not like we are overspending is it?

£12billion a year in overseas aid is £1billion a month - surely you wouldn't want to cut the amount we send to India and Pakistan (their arms race doesn't come cheap) or to various African dictators (have you seen the price of top of the range Mercedes these days)? 

Public sector guaranteed benefit pension plans get more expensive each year - rather than put money aside for your own pension isn't it fairer instead to pay that money over in tax to fund the public sector pension deficit and ensure at least they can live in relative luxury when they retire?

And don't forget that the EU needs billions from the UK.  Remember only the UK and Germany are net contributors so the other 25 'nations' need your money.  It easier for several of them than bothering to collect all their own taxes.

Actually, I forgot to ask you if you own your house?  The tax will only hit you if you do.  If you are in a social or council owned property you don't need to worry.  As well as having subsidised rent you won't have to pay a penny of this property tax.  In this case its an easy calculation how much the Lib Dems want from you.  Its a big FAT ZERO.  A vote for them will cost you nothing directly.

But if you do own your home - even if you've just struggled to buy it with a small deposit or if you are in negative equity and in fear of repossession - the calculation is easy.... the Lib Dems would want 1.5% of the house value from you this year (and next year, and next year......). 

Here's a ready reckoner for you:-

£100,000 = £1,500 a year in new tax.   
£150,000 = £2,250 a year in new tax
£200,000 = £3,000 a year in new tax    
£250,000 = £3,750 a year in new tax
£300,000 = £4,500 a year in new tax    
£400,000 = £6,000 a year in new tax.

Or even easier - whenever there is an election play safe and avoid the Lib Dems!

NAUSEATINGLY IMMATURE

The immaturity of Nick Clegg and his party is very apparent in their tit-for-tat response to the failure of their constitutional vandalism of the House of Lords. The Coalition Agreement included a clear trade-off between the Conservatives and the Libdems. They would get a referendum on the Alternative Voting system and the Conservatives would have a chance to create a level field voting system. At present the system is heavily biased towards the Labour Party. When Tony Blair got 36% of the national votes that gave him a majority in parliament of 20 seats - whereas when David Cameron won 36% of the national votes he fell significantly short of a working majority. Where is the famous British sense of fair play in such a system? The boundary changes proposed within the Coalition Agreement would have righted that wrong. So does Clegg now believe that Labour should have a built in advantage when it comes to national elections? Doesn't he desire a level playing field when it comes to deciding which party wins? He has previously been on record as saying that the system is unfair and should be changed but now in a childlike fit of pique he has changed his mind. How petty! How nauseatingly immature!

LOOSE MONEY

I can't believe how free and easy some people are with public money. Today both the newspapers and the TV news are full of LibDem former leader, Lord Ashdown, talking about voting against the proposed benefit cap of £26,000pa. For a person prepared to work and support themselves and their family, they need to bring in about £35,000 a year before tax to have the same standard of living as a family at the proposed benefit cap. Half the population don't make that sort of money. What incentive to work is there for some one of only modest earning capacity when they can rake in £26,000 just sitting on their sofas watching their mates on the Jeremy Kyle show? But even that cap is too low for Lord Ashdown. Labour were obviously happy for families to get £50,000 or even significantly higher in overall benefits. Indeed they set up the system to disguise the total by creating a plethora of individual benefits and an ever increasing army of public sector employees to administer all the handouts.

Give Nick Clegg his due - he's woken up and smelt the coffee. He realises the present benefit system is both unfit for purpose and financially ruinous for the country. But how many of his rank and file are behind him and how many are cheering on Lord Ashdown? How many commuters travelling into London long to live in places like Kensington and Chelsea but instead have to buy homes outside London then endure an hour or more each way to get to work. Meanwhile the combined taxes of several of these hardworking families are needed to pay the housing benefit to let one family, making no contribution to the public purse, live in Central London.

UPDATE: On the above theme, Iain Duncan Smith is quoted in Monday's London Evening Stardard saying "The purpose of this is not to punish people but it is to give fairness to people who are paying tax, who are commuting large distances because they can only afford to live in the houses that they have chosen". (Click on the word "saying" above for a link to the article, which also includes "some households have been living on benefits of more than £100,000 a year in affluent areas of London" [New Labour, New Excesses?]).

A HAPPY NEW YEAR

The first day of 2012 and my best wishes for "A Happy New Year" to anyone reading this posting. Although individually there may be happy 2012's it is looking very bleak collectively. After the Merkozy Junta just managed to keep kicking the can down the road in 2011 I suspect events will come to a head in 2012. Apparently the UK Treasury is doing some worse case scenario planning based on the premise that some countries after defaulting and with the euro collapsing will have to physically close their borders as well as put a halt to all money flows across their borders. UK holiday makers could find themselves marooned abroad with ATMs not working and will need to be repatriated.

This whole situation of over-indebted countries facing collapse can perhaps be best explained by the following:-

Despite it being a self-evident truth it seems that politicians of the Left and so many voters continue to fail to grasp it.

BORROWING AT 2.2% INTEREST RATES - A RECORD LOW!

In the news this morning is the fact that the Government today sold £3billion of new 10 year debt at a 2.2% interest rate. A record low rate of interest! What an amazing vote of confidence by international investors in the UK and this government just days after we are supposedly "isolated" and "a pygmy nation". Contrast to Italy and Spain who paying 6%+ on their new borrowings. If we still had a Labour government and had not implimented an austerity programme then our borrow costs would be like Italy and Spain. That £3billion of debt alone would have cost us more than £100million a year in extra interest - more than £1billion over the 10 years!

Can you imagine the sort of income tax and VAT rates needed to fund Labour's spending policies and to pay the resulting penal rates of interest on our borrowings? Both coalition partners can be proud of the economic policies they have put in place since the last General Election that have brought us back from the Labour road to ruin.

A NIGHTMARISH, TOTALITARIAN, FEDERAL STATE

Although I've supported the Conservatives since my school days, I never was a true fan of David Cameron. When all party members were given the choice between Cameron and David Davies I firmly put my cross in favour of the latter. However since last Friday morning I've had to totally revise my opinion of our Prime Minister. For the first time in forty years we have a Prime Minister who has stood up for Britain's interests and used the veto rather than give in as usual with concession after concession as the continent moves ever closer to a single federal entity with a serious democratic deficit.

I really never believed that he would have the strength of character to say "No!" when alone and totally outnumbered. That takes real guts! Well done Mr Cameron! The 9th December 2011 may go down as an pivotal date in our nation's history.

Of course no sane organisation would ever hold its important meetings during the early hours of the morning. The fact that the EU chooses to do its business that way merely sums up what a completely ludicrious creation it is. Can you think of any other organisation that would choose to start proceedings with an evening meal and then effectively lock its participants in a room through the night until a decision is reached. Totally barmy!

With hindsight it is easy for some commentators to say that the veto outcome was obvious. The French established a set of conditions designed to push our PM into a corner. One of their key goals is to marginise Britain within Europe. Cameron was naive in thinking that he could negotiate an agreement - but that is the mistake that all previous British PMs have made. The EU doesn't do negotiations that in any way align with Britain's national interest - the EU just dictates and demands agreement on its own terms. Perhaps a weasily worded and worthless tit-bit is offered as a fig leaf but never anything of real consequence. Thank goodness that Cameron was wily and astute enough to see the truth.

Where does that leave the UK if the other 26 move ever closer to fiscal union and a single federated European state? Someone has described it as being left on the dock as the Titanic set sail. Others use the analogy of being locked outside a burning building. With the EU now accounting for less than 15% of world GDP we can start to lift our eyes to the wider horizon and the 85% of world GDP beyond. Its a shameful disgrace how we turned our backs since the 1970s on our kith and kin in the Commonwealth. The Queen always knew who our true friends were even if politicians couldn't, or wouldn't see it. Plus China, Brazil - well the list could go on and on - are the future for commerce and trade. True, they are further away than our European neighbours but economically they are the future. Germany may be an economic powerhouse and increasingly the dominant master of the EU but a lot of its perceived 'strength' has been built from the inbalances between itself and other EU states arising from the single currency. In the long term these inbalances are unsustainable - witness how it has left Greece, Italy, Portugal etc.

So the EU (excluding the UK) moves on to a Fiscal Union - a federal single state dominated by France and Germany and controlled out of Brussels. All the other 'nations' will have to get their annual budgets first scrutinised and approved by a non-elected group of commisionaires in Brussels before putting it in front of their own parliaments. Nations (strictly speaking, better now called regions) with less autonomy than Suffolk County Council or even our local Mid Suffolk District Council! Regional leaders that won't toe the line will be replaced as we have already seen in Greece and Italy. That is the nightmarish, totalitarian result that has arisen from the EU attempts to preserve its single currency ideology - a soviet union of Western Europe.

Thank goodness we in the UK are on the sidelines. The whole global economy will suffer when the Euro project ultimately collapses - we can't be immune to that - but with our own sovereignty, own currency and own democracy we can mitigate many of the effects from that fallout. Or, when the democratic deficit in the new EU State finally leads to a civil war within it, again thank goodness we are on the sidelines. The protests seen so far in Athens and Rome are a mere prelude to what's to come in the bleak EU future.