Friday, 9 September 2011

Sleepless nights

Here is a chart that should give everyone sleepless nights. During the last fiscal year, public expenditure amounted to 47.1 percent of GDP. Revenues, on the other hand, were only 37.2 percent of GDP. That left a hole in government finances amounting to a staggering 9.9 percent of GDP.

Here is the funny thing about government finances; although snotty economists might tell you otherwise, government finances are not a difficult to understand. There are four concepts one needs to grasp; revenues, expenditures, debt and deficits.  Moreover, it is all just common sense.

If expenditure is higher than revenues, then the government has a deficit and it must borrow to meet the shortfall. If countries keep running up deficits, then the overall level of debt will rise. That will work for a while, so long as creditors are willing to cover your shortfall. However, if a country keeps increasing its debts, at some point creditors might call time. That is what happened to Greece, Ireland, and Portugal. It is as simple as that.

How does a country escape from a deficit of almost 10 percent of GDP? The least painful option is economic growth. If GDP is rising faster than expenditures, then over time, the expenditures to GDP ratio will fall. Revenues are also closely linked to growth. If GDP is growing rapidly, then so are taxes. This of course, assumes that expenditures are kept under control while GDP and tax revenues are growing.

Sadly, the UK economy is barely growing. Instead, our much beloved coalition must rely on more painful methods to balance the books. It must either raise taxes or cut expenditures. Osborne has already hiked VAT. He has also started the painful process of downsizing the government.

But what about this man Keynes? Didn't he have a grand old theory about spending your way out of a recession? Well, the previous government tried that trick and it didn't work. Hard to say what went wrong, and in the grand scheme of things, it doesn't really matter. The plain facts are that the UK has a huge deficit, government debt is exploding, and this can't go on forever. The economy is not growing and therefore a return to fiscal sustainability will be painful.


Anonymous said...

Hmmm - Keynes "trick" was government ACCUMULATING money during the good times, and spending as stimulus during bad times.

Our government ran large deficits during the good times, then cite the name of Keynes to continue insane deficits in the bad.

The noise in the background is Keynes spinning in his grave.

Anonymous said...

Greece, Ireland and Portugal are not sovereign countries - they all tax, borrow and spend in Euro, which is under German control.
If the UK government deficit spends 9% of GDP, whoever ends up with the money will readily queue up to buy as much in Gilts. What else could they do with it?

Anonymous said...

well said anon.

"hard to say what went wrong" lol.

If you buy a new sofa with nothing to pay for 12months.
And then in 12months time you can't afford to pay.
The solution is not to buy another sofa!

That might seem a stupid analogy but what all Browns borrowings and PFI tricks were about is bringing forward spending while backloading the costs inorder to trick the public into thinking we were wealthier than we are in reality.

We are now experiencing a massive drag on the economy paying for all that borrowings (it isn't just the official figures).
This drag will continue for a long time.

I don't believe keynesian stimulus would work even if we did what he described, saving in the good times and then spending some of that savings in difficult times, because I don't think the govermnet can pick winners and losers as effectively as private sector.
But, when keynes suggested stimulus Britain was the workshop of the world, that government money would have gone almost directly into UK factories.
A totally different situation from today.