Don’t ignore national finances, they do matter: Part 2

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.

Don’t ignore national finances, they do matter: Part 1

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.

Recast cuts as savings

Benedict Brogan in the Daily Telegraph says we should recast the term used to tackle our financial crisis. He says that as Gordon Brown always used the word ‘investment’ for spending, the government should use ‘savings’ instead of cuts.

Well Ben, I’ll try to make the change, and use savings rather than cuts. Maybe I should call them investment savings.

Let’s thank Tom Winsor for his efficiency

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.

The future of the Public Forest Estate

Defra’s consultation on ‘The future of the public forest estate’ has caused a furore among the glitterati, as Defra seeks the sale of some 40,000 ha of the Forestry Commission England’s 258,000 ha estate.

The review of the Forestry Commission’s role, and that of the public forest estate was begun by the previous government in a consultation titled, ‘The long-term role of the Public Forest Estate’. The result of this consultation can be read HERE. The Detailed Findings of the consultation make interesting, if lengthy, reading.

I wonder if the celebrity objectors contributed to the consultation. I did.

John Redwood’s blog post Save our trees offers the view of the illusory difference between public sector trees and private sector trees. John argues well for a balanced view of the need to manage change.

It’s perhaps worth considering why we have a Forestry Commission. It was created by the government during WW1 to ensure the supply of wood for pit props for the coal mining industry. The buying of land and makin mono-culture pine plantations continued for the same reason through WW2. In recent times the Forestry Commission has evolved, but a strategic re-think about what it does, and what it’s for, is long overdue, which the previous government recognised.

The Forestry Commission is in essence a nationalised timber producer and forestry owner, who has segued into  leisure provision for the general public.

The idea that woodland cannot be sold once it becomes part of the Public Forest Estate is perverse. Of course we must protect our ancient and heritage woodland, and even add to it, which the Defra consultation promises to continue to do. In the Forestry Commission England 2009-10 Annual Report it notes sales of its land,

“The woodland sale market has been very strong in recent years, to some extent riding on the back of agricultural land prices. This is particularly so in the South of England where there is very strong demand for “hobby woodlands” and environmental ownership. Woodland sale values across the country have remained steady a fluctuating timber market, and remained a solid choice of investment in the turbulent financial market. Price gains have comfortably exceeded inflation.”

I think, just like John Redwood, that there’s merit in re-thinking both the role of the Forestry Commission and its ownership of some of its land. Personally, I’ve always found it odd that we manage our forests and woodland on the principle of benign neglect, the opposite of that of our continental neighbours. In fact, I think I’ll find out more how the Germans, for example, manage their woodland.

Cuts to legal aid budget, everyone agrees

Cutting the cost of the legal aid is apparently something that all political parties agree upon. Of course the barristers and solicitors don’t agree, claiming it to be a ‘complete outrage’.

Being no lover of the legal profession, this, for me, is the best spending cut to date. We mustn’t become a litigious society, like America. We need to redeploy the talents of our people away from the law into more productive sectors our economy. The Times reports Jack Straw saying in 2009,

“In the early 1970s, there were just over 2,500 barristers and about 32,000 solicitors, compared with 15,000 and 108,000 respectively today, he said. There is roughly one lawyer for every 400 people.”

Crazy numbers. Just as Eddie Mair on the PM radio programme quoted the crazy comparative costs of legal aid in France, £3 per head of population, Germany £5, New Zealand, with a similar legal system, £8, and in England & Wales at £38 – the highest in the world.

Why are political parties in agreement on this cut? Going to law, to resolve a dispute, costs a huge amount of money. It can be done more cheaply through mediation, without the taxpayer supporting barristers on almost £1 million a year, earned purely from legal aid.

Little chance of public unrest over the cuts

The violent disorder connected with the recent student demonstration over a rise of in tuition fees, seems to some respected commentators – Matthew d’Ancona for one – as a precursor to a period of unrest and general disorder.

I’m surprised they predict an era of public disorder over the spending cuts, and changes to education, and welfare provision.  I believe that the majority of the public accept the correction to our public finances as necessary, even though they may be personally painful. Remember, stoicism is a traditional British value.

To my mind the public accepts that the cuts aren’t quite as severe as expected, no matter the emotive and inaccurate language of those railing against the cuts. Taking spending back to the levels of 2006/7 isn’t the end of the world, and the public generally recognises that.

The horror stories of the financial mess of Ireland and Greece, and probably soon, Portugal, Spain, and even Italy, are a continuing reminder to everyone just how important it is to get our national finances back in order.

So, no, I don’t think there’ll be a period of public disorder. The violence connected student demonstration has been a timely warning to those wanting to demonstrate about the cuts that visibility brings a level of exposure, which can be uncomfortable.

Controlling student protests – unlikely

Is it a truism that student protests always become unruly? Students controlling student demonstrations, now that’s unlikely to be a succesful strategy, don’t you think.

Those organisations practised at mobilising people to demonstrate, such as unions and charities, generally have stewards to monitor protesters. The National Union of Students has shown today that they lack the capability to demonstrate without causing damage or injury. Today’s student demonstration at Conservative Part offices at Millbank Tower proves my point.

Benedict Brogan writing in the Daily Telegraph highlights an interesting point about the demonstrators,

“…. sympathy for impoverished students will be undermined if it turns out they can afford to take time out from their studies to travel to London, attack policemen and destroy property.”

In support of his argument, I noticed that the students from the University’s of Strathclyde and Glasgow in the vanguard of the protest march. Travel from Scotland would have cost a pretty penny, or perhaps student union funds were used, whatever.

The BBC report on the numbers attending,

“Welsh colleges said they were sending about 25 coaches to the protest from across Wales.”

11 coach loads of students from Birmingham University.”

Amazing how so many coaches, the BBC reports the “general secretary of the University and College Union, said the union had hired hundreds of coaches from across the country”, can descend on London without the Police being prepared. They were woefully unprepared for the size and type of protest.

Our economic health: Part 2 Budget Deficit

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:

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.

Our economic health: Part 1 National Debt

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.