This report by McKinsey Global Institute on Debt and deleveraging: Uneven progress on path to growth, shows how the UK has work to do to reduce debt. This graph for the report shows just how much more work we have to do.
I’ve listened to David Cameron’s interview with Evan Davis of the BBC Radio 4′s Today programme. Evan Davis persistently interrupted Cameron, making the interview uncomfortable to listen to. But, I guess that’s the penalty we probably must accept when interviewers quiz politicians who are immensely well practised in answering questions. Never the less it was tiresome to listen to.
One question where Cameron was allowed a reasonably uninterrupted flow was when Evan Davis asked Cameron about “Gordon Brown emerging as favourite as the next managing director of the International Monetary Fund director …. “. Cameron’s replied
“I haven’t spent a huge amount of time thinking about this. But it does seem to me that if you have someone who didn’t think we had a debt problem in the UK when we self-evidently do have a debt problem, then they might not be the most appropriate person to work out whether other countries around the world have debt and deficit problems”.
…. it must be someone [to run the IMF] who understands the dangers of excessive debt, excessive deficit, and it really must be someone who gets that, rather than someone who doesn’t see a problem.
So that’s a big NO then. Thank goodness. Here’s a fuller review on what Cameron said about the IMF leadership.
UPDATE: Seems I’m in agreement with the heavyweight’s in our media over this morning’s interview between Davis and Cameron. David Hughes in the Daily Telegraph says Cameron gets a word in edgeways.
Credit rating was the subject of Part 1, and how our performance in solving our financial crisis is watched by those rating agencies.
Now let’s look at how we’re doing on balance of trade and payments. If we import more than we export we have to fund this by borrowing. Why choose this topic? Easy, look at the situation in the USA, who yesterday released poor trade deficit figures, resulting in an almost 2% drop in the US stock markets. There’s even talk about a downgrading of the USA’s credit rating, proving that even the world’s largest economy isn’t immune from critical assessment.
Meanwhile, there’s encouraging news for the UK, our January trade deficit narrowed, and is moving in the right direction. Still a deficit though. By lowering what we import and increasing what we export can double any improvement in our trade balances.
Looking at our balance of payments shows that we remain heavily in deficit in goods, importing much more that we export, but, we’re in healthy surplus in services. Services include all those things that the City and our financial services sector sells, a neat reminder that ‘banker-bashing’ will have consequences if they move abroad.
Everyone is getting steamed up about the Police Pay Review and now Lord Hutton’s review of public sector pension provision. Trouble is as a nation we’ve been living beyond our means for quite a while. Do you remember, I’m sure you do, the last Labour Chief Secretary to the Treasury, Liam Byrne, leaving the following note for the incoming government,
“Dear Chief Secretary, I’m afraid there is no money. Kind regards – and good luck! Liam.”
The key Coalition policy is to reduce the deficit, and in doing so ensure that the financial markets see us as a well-managed and secure economy. Why is this important? Simply that we still need to borrow money to pay for our lifestyle, as we can’t yet pay for it out of what we earn as a nation.
Yeah, yeah, why not pay off our debts over a longer period to lessen the pain. Sorry, no can do. Can’t take that risk. This week one of the rating agencies downgraded Spain’s credit rating. Result, it will now cost them more to service their debt, cancelling out any policies to improve their financial situation.
We’ve all heard about the problems with Greece, Ireland, and Portugal. Now that Spain is now exposed to tougher borrowing conditions, it shows that bigger countries aren’t immune from being judged on their ability to solve their financial problems.
Spain’s credit rating was reduced a further notch to Aa2. In the UK we have a far, far bigger debt as a % of GDP than Spain, and we can’t afford to lose our triple AAA credit rating. Any increase in the cost of servicing our much larger debt would be crippling.
The Independent Review of Police Officer and Staff Renumeration and Conditions was released this week, and mightily impressive it is too, after only begun on 1st October last year. The Review’s author, Tom Winsor, deserves praise for delivery his report in a little over five months, which was over a winter period with poor travel conditions.
How we all must wish that other such reviews were completed as quickly. The Iraq Inquiry commenced on 30th July 2009, and is still on going, and that’s simply far too long, and no doubt eventually far too expensive. The Bloody Sunday Inquiry began in early 1998, and it wasn’t until March 2010 that its final report was published, at a cost of over £100 million. If you’re interested in the content of the report, and I’ve skipped through it, I recommend these.
There’s much talk of Ireland in financial extremis. Should we help our near neighbour by lending them money? Tough question. Possibly, but would they want it from us, all that shared history about their gaining freedom from us.
The problem for many countries in Europe is the single currency. Those in the Eurozone are, like mountaineers, all roped together. If one falls, they all fall as Herman Van Rompuy has said. That’s unless they cut the rope and cast some adrift, which the EU seem unlikely to do. I see a fudge coming.
The debt problems and hidden banking toxic debt of many European countries are huge, possibly insurmountable. Let’s review the list with the help of the wonderful FT Alphaville blog and others:
- Greece: Looming headache;
- Ireland: Graph of the pain; Grisly; Blame; Bankrupt; No democracy;
- Portugal: Contagion;
- Spain: Concerns;
- Belgium; A non-country;
- Italy: Not immune
And that’s not including problems of the other smaller and newer nations in Europe, such as Hungary. Gloomy stuff I know.
Now where’s my favourite economist, Liam Halligan, when I need him?
LUNF and TINA are two important message carriers.
The deficit hasn’t gone away. It’s still with us, painfully so, as September’s government borrowing was £16.2 billion – the highest ever. All the government’s policy announcements about changes to our welfare system, the defence review, and spending cuts are to solve this most pressing issue.
So what are these message carriers, LUNF and TINA?
LUNF - let us not forget that eradicating the deficit is the main goal, and TINA - there is no alternative to spending cuts, no matter what Labour and the leftist intelligentsia say about relying on tax rises, they don’t solve the problem, they merely delay its resolution.
Don’t think that the deficit reduction is THE challenge facing us? Then I suggest you read this phenomenally good article by Morgan Kelly, Professor of Economics at University College Dublin, in today’s Irish Times. Not quite in Ireland’s plight, we were on our way towards it. Just look back to HERE, which was only in January this year.
Here’s a hugely informative chart about the world’s top 50 banks. Not sure of the date of compilation of the chart. [Click to enlarge, apologies for the large file].
If ever you needed proof of why we in the UK are in an exposed position, then this chart is that proof. We have banks that are in position 1, 4, and 5.
The argument raging in the banking regulatory community is how to control banks that are ‘too big to fail’. Alone, the Royal Bank of Scotland’s asset base - the world No1 bank by assets - is $3.8 trillion, outstripping the UK’s GDP at $2.4 trillion. Never mind the exposure of the other big UK banks.
As the chart states, assets are for a bank are its loans and mortgages. The argument, as Liam Halligan is always ready to point out, is the quality of these loans. Is their still junk in the loan book? Liam thinks there still is.
It seems to me that a bank break up is surely one of the possible options being considered by the committee charged with recommending solution s to the problem. Don’t feel the pressure guys, as Robert Peston comments.
I’m not trying to give you the collywobbles. There is a problem, and a big one. But, the world will come to our door if we can solve it. Hell, I’m an optimist.
I’m reviewing our economic health. Firstly by looking at our key economic indicators, which started with the National Debt, and now to look at the Budget Deficit.
What is the Budget Deficit?
The Budget Deficit, commonly referred to as the deficit, occurs when a nation spends more than it collects in taxes. Pretty simple.
Now to the more complex and contentious aspect. National economic health varies according to the business cycles. The ‘booms and busts’ in other words. Business cycles are hard to predict, as the Governor of the Bank of England said recently.
When a budget goes into deficit driven by the business cycle, caused by an economic slowdown, it’s called a cyclical deficit. Such a deficit is considered acceptable as the deficit is paid back in times of surplus. In effect it smooths out the business cycle.
However, when government budget deficits continue over the business cycles and spending is more than the long-term average of tax revenue, then this is a structural deficit. This kind of deficit indicates living beyond your means. Plainly unsustainable. I’m sure you can spot the chance for politicians to wriggle around these two types of deficit.
Right, where are we with the deficit?
Simply, in a bad way. The deficit is financed by borrowing, which is referred to as Public Sector Net Debt – PSND for short. Let’s look at the figures:
- HM Treasury June Budget Diagrams are an easy way to view the numbers
- Debt Bombshell also has the deficit numbers
- National Statistics has the latest borrowing figures
The following chart puts our humongous deficit into a longer term context.
What are the problems?
The problems resulting from having a large deficit are:
- Funding the deficit. To borrow money means finding a willing lender with money to lend. In times of international financial crisis, that’s not always a given.
- Drains wealth away from productive investment. Money borrowed to finance a structural budget deficit takes money from private investment.
- Corrective action is painful. Accepting that a huge increase in a budget deficit is unsustainable, then taking urgent action to cut spending or raise taxes, or both, will be painful.
- Lack of resolve. Political pressures can eat away at political resolve. What’s needed is eternal vigilance, and no fudging of tough choices.
In summary, we may not like the need for spending cuts, but we urgently need to return our national budget to a semblance of solvency.
I’m getting back on track after a flurry of meetings, events, and necessary recovery time. I’ve been meaning to do a series of posts on our economy. Now seems a good time, after the first coalition budget, defence review, and comprehensive spending review.
The starting point is to look at the key indicators of our economic well-being; the National Debt, Budget Deficit and Structural Deficit, Balance of Payments, and Inflation.
The National Debt is, in theory, the total amount of money the government has borrowed to pay for wars, and infrastructure. Stuff you could define as investment.
Looking at the National Debt as a % of GDP,which is the total value of everything produced in the country, is a good way of relating it to the size of the economy.
What’s the size of the National Debt?
You’d think there would be a simple answer to this question. Nope, it depends what you include in the calculation. The official national debt is £932billion, equivalent to about 62% of GDP Some people think our national debt is as high as £7.9 trillion. These two sources describe the difficulty in measuring the national debt.
Where does the money come from?
The government sells ‘gilt-edged’ securities, for which it receives money against a promise to redeem the loan at some future date, and on which they pay a small but guaranteed and regular interest. UK pension funds and insurance companies are the biggest purchasers of gilts, followed by foreign investors, all of whom are looking for a safe investment.
What are the problems?
There are a number of problems, which are:
- Borrowing for lifestyle not investment. It’s possible to argue the case for using debt to invest in roads and the like, but to borrow to pay for welfare and health spending is not investment, it’s living beyond your means, which is what we’ve being doing for some years. It’s unsustainable, even in the short-term.
- Speed of its increase. In the year 2000-1 the national debt was £311 billion, by 2010-11 it’s reached £932 billion. Uncontrolled increases in debt cause investors to worry about the ability of governments to repay the loans, and also to meet the interest burden, which results in an increase in the cost of borrowing money. Strong investor confidence lowers borrowing costs.
- Size of the interest bill. The interest we pay for borrowing £932 billion is £42.9 billion, which is more than we spend on defence. Again unsustainable.
- Difficulty of reducing the national debt. It took until 2006 to repay loans from the USA to pay for World War II. The debt can be paid down only when our economy grows and national income is higher than spending. Now that’s a tough call at present.
In summary, managing the national debt is hugely important. It’s not an arcane subject. It’s an accurate reflection of the state of our economy.