Sunday, 19 October 2008

The fast track to a public finance disaster

According to the FT, Darling is going to "fast track" public expenditure. He plans to "accelerate" plans to build schools and hospitals in a desperate effort to fend off the expected recession.

Two thoughts immediately spring to mind. The first is a linguistic one. When the government say "fast-track", and "accelerate", they really mean increase and expand. An accelerated plan implies more spending now with less later. Of course, there will be no cut back later. Make no mistake, Brown and Darling are big government spenders.

It is just another case of the government using misleading language to confuse us about their true intentions. Darling is going on a debt financed spendfest, where today's generation tries to avoid some belt tightening by pushing the costs of their extravagant lifestyle onto the next generation.

The second thought concerns the recession itself. Invariably, politicians will do anything to avoid a slowdown on their watch. They will increase the fiscal deficit, hire armies of public sector employees and accumulate a mountain of debt. If need be, governments will ignore excessive risk taking in the financial sector, and when it all goes belly up, they will use truck loads of tax payers money to clean up the mess.

Increasing public expenditure might hold off a growth contraction, but only at the expense of more financial instability later. The UK government is now building up some shockingly large future liabilities.

Within ten years, pension and health care expenditure will explode due to a rapidly ageing population. Moreover, the costs of the banking sector bailout will still be on the public sector books. The taxpayer will also have to pay for those vanity projects such as the Olympics and those two mega-toys, sorry, aircraft carriers that the navy wants.

It would be more sensible to sort out the public sector budget rather than seeking out new expenditure opportunities. The government needs to balance its books. It should start saving some resources to confront these huge challenges that are now hurtling down the track.

This country doesn't need accelerated expenditures; it needs some savings.


Mark Wadsworth said...


mitch said...

You couldn't make this stuff up could you? you face financial ruin,you owe loads and what do you do? go mental with the remaining credit cards to buy toys for the kids.

aSteve said...

I do think that 'fast track' means spend now rather than later. The reason for this is that later, we won't have a New Labour government. They've about 18 months left - and there's no reason not to throw the dice.

The curious problem is that if government spending slows, so will tax receipts - leading to a downwards spiral. I've expected for about a year for there to be an 'epic' conference with all the worlds' leaders where they decide to lend each other huge sums for each others' governments to spend. If every nation is 'in on it' - then there are no practical problems with devaluation of currency; it could solve the public pension shortfall; it could avoid an economic collapse depression-style. Unfortunately, it would be entirely unethical - rewarding the reckless and profligate - destroying any hope of social mobility. I had (and have) no idea what outcome to expect... As events unfold these weekends, I'm seeing something broadly similar... lots of nations' leaders meeting in 2s/3s/4s - then bickering. Perhaps the agreements to spend will be reached but only in a few years - when the elite of every nation are on their knees?

Anonymous said...

Well, that ought to solve the deflation problem. Er... Can someone remind me why deflation is a problem?

A David

mike said...

The government is losing money in many key areas and should be careful about spending future tax receipts. I predict significant loss of tax receipts from the banks, building companies, estate agents, retail outlets, and luxury goods suppliers. I wonder if this has been taken into account in future revenue calculations.

It's predicted 3 million could be out of work by the end of next year. Think of all the benefit costs and loss of employment tax receipts.

To make matters worse some people in HMRC are incompetent. For example last year’s IR35 ruling which effectively banned composites was a complete disaster. Within a few months over 100K companies were created once composites were banned. This meant these 100K+ people now getting director and small company related benefits (e.g director’s minimum pay, flat rate VAT, etc) which they did not have before. I estimated a loss of revenue of over 1 billion because of it. Only now this loss being visible in tax returns. Now they desperately try to reclaim the tax by raising the lower rate of corporation tax by 1% per year. This in turn could now drive people to setup their company’s abroad such as in Luxembourg where the taxes are much lower. Even more loss of tax receipts.

The outlook is bad. Only a fool would spend tomorrow’s predicted money. When a new government comes to power I then expect the true scale of this mess to be revealed. It’s sad that the new government will struggle due to discontent even though it’s not their fault.

Nick von Mises said...

Dead people don't vote. Unborn people don't vote. Kids don't vote.

There's the answer for why politicians always squander cash.

Anonymous said...

Big spending in the economy drives up inflation, doesn't matter who's doing it.

In the 1970's it was the UK government trying to spend their way out of trouble as the Keynesian tools they used told them they should, only they where meant to spend the surpluses made during the good times.

The point is there were no surpluses during the good times, like all sloppy governments we spent it and then borrowed. Just like 2003-2007.

Then by 1975, seeing a big economic downturn looming (just like in Oct 2008) the Labour government started spending in the economy to stimulate demand, and spend their way out of trouble.

It was a disaster because we had to borrow to spend and this resulted in huge amounts of inflation.

Now look at today we're gambling that inflation will fall, and using this to justify interest rate cuts. So we're left will no controls on inflation, huge government borrowing and a plan by the government to spend recklessly in the economy. Add to this the collapse in tax revenues, increase in unemployment (benefit claims) and a rapid rise in home repossessions, and we're headed right back to 1979.

When will Labour governments learn to stop trying to intervene in the economy and manipulate the outcome of a crash. For this very reason governments decided to end the days of big state interventions - they don't work and throw good money after bad based on false assumptions like impending deflation.

Josh said...

Brown and Darling will do anything and say anything to keep onto power.