Thursday, 30 September 2010

Cuts: separating fact from fiction (updated)

There is far too much overblown rhetoric both in the mainstream media and in the blogosphere regarding "cuts" (such as this from Plaid Wrecsam and this from Everyone's Favourite Comrade) which is both full of inaccuracies and based on lazy assumptions. Accordingly the Druid Statistical Research Centre © has taken a closer look at the actual figures announced in the June Budget because there is scant little evidence that anybody else has bothered to do so.

However, first of all, lets put what we are about to analyse into context. In order to make the point that government debt is not historically high, several bloggers have been displaying the following chart (for example here):


Its easy to look at this and conclude (as many have done) that actually public debt is fairly minuscule compared to how indebted the country was following the accumulated debt of having fought two world wars. However the problem with this chart is that it represents public debt as a percentage of GDP at the time. As current GDP is approximately four times larger, it is illuminating to view the same figures adjusted for inflation:


This is chart uses exactly the same dataset but with the figures adjusted to represent the real value in 2005 pounds -- and shows very clearly our current national debt is virtually as high in real terms as it was following the devastation wrought on the UK's finances of having fought two world wars. Clearly this is not a good position to be in -- however the common fallacy on seeing this graph is to mistakenly assume that the 2010 peak is a summit like the peak around 1946, and that the 'cuts' which the coalition government are about to implement will see this debt falling rapidly from here on in. Unfortunately, as we will see, that is not the case. The point on the chart with which we should be comparing our current level of indebtedness is in fact around 1940 as, despite the apparent "ferocious cuts", public debt is set to double between now and 2016.

Don't believe me? Lets take a look at the figures.

Here is how much the current coalition government is actual planning to spend each year from now until 2016. (Just in case you don't believe government figures, all the data I am using from here on in comes from this report (pdf) from the quasi-independent Office for Budget Responsibility. In every case, the figures for '08-'09 are actual, those for '09-'10 are estimates, and those thereafter are OBR forecasts).

click to enlarge

So despite the rhetoric of "eye-watering" and "blood-curdling" cuts, the reality is that in nominal terms government spending is actually set to rise each year until 2016. So where are the cuts? Well, these figures are not adjusted for inflation, so in real terms spend is actually going to be remaining pretty static -- but that is still not a cut. Lets look a little closer at these spend figures:

click to enlarge

These are exactly the same spend figures but now broken down to show how much is current expenditure and how much is capital expenditure. Current expenditure represents the day to day costs of running government services and includes things like civil service salaries. Capital expenditure represents the costs of buying fixed assets, like schools or hospitals for instance. Now we can see that planned capital expenditure is being reduced year on year, in order to protect current expenditure -- in other words the government is planning to reduce spend on building things in order to protect public sector jobs. I think we can all agree that protecting front line services and jobs should be the government's first priority - and this appears to be what the coalition is trying to do.

I said earlier that public debt is actually set to double from current levels by 2016 -- why is this? Well, lets compare the above government spend with forecasted receipts (i.e. total government income from taxes, etc) over the same period:

click to enlarge

The blue bars represent the same government spend figures we looked at above, the green bar shows how much revenue the government expects to receive each year over the same period. As you can see there is a considerable gap between spend and receipt -- i.e. the deficit -- all of which needs to be covered by government borrowing. Why is there such a large gap between income and spend? There are several reasons:

  • decreased tax income due to companies make less profit, wages being depressed, and more people being unemployed;
  • increased social security payments to cover the greater numbers of unemployed;
  • increased interest payments as government debt increases;
  • the fact that the size of the state has anyway been artificially increased over time beyond the public's willingness to pay for it through taxes (in fact the last time receipts exceeded spend was in 2001, every year since then the government has spent more than it earned).

So what about the costs of bailing out the banks? Indeed just yesterday another blog shortlisted for the "best welsh political blog" category, Everyone's Favourite Comrade, wrote this:

"The only reason that we have a deficit is because all the money was given to the banks"

This, I'm sorry to say, is complete nonsense. The cost of re capitalising the failed British banks came to £117bn and those costs were spread out over the years 2007-09. There is no subsidy to banks included in the current deficit, and indeed Gordon Brown was running a deficit long before the Northern Rock debacle in 2007.

Anyway, here's the forecasted borrowing figures (i.e. deficit) between now and 2016:

click to enlarge

Of course another way of describing the deficit is as the rate at which national debt grows each year -- accordingly lets take a look at what effect this deficit will have on Government debt (and bear in mind that the £771bn figure is the 2010 'peak' in the second chart above):

click to enlarge

So as you can see, even at this pace of 'cuts', government debt will effectively double to £1.3 trillion by the end of the parliament. And remember the government doesn't really have debt -- it is actually our public debt, which we (and our children, and our children's children) will have to pay back. And indeed we are already paying it back -- take a look at the amount the government is forecasted to spend on interest alone as the total debt spirals upwards:

click to enlarge

Yes, thats right, interest payments are going to double too. The figures involved here are so huge it might be difficult to understand them unless we put them in context. Accordingly I have added the amount the government will spend on debt interest this year, and the amount it is forecasted to spend in 2016, into a chart of departmental spending for 2010-11:

click to enlarge

So as you can see, current debt interest is the fourth largest single government expenditure -- more than we spend on defence, police spending, the environment, and twice what we currently spend on transport. By 2016 however, debt interest will have risen to be almost half of what we spend on the NHS! What a tragic waste of money. I can only wholeheartedly agree with Lord Myners, Gordon Brown's City Minister, when he said:
"There is nothing progressive about a government that consistently spends more than it can raise in taxation and certainly nothing progressive that endows generations to come with the liabilities incurred in respect to the current generation."
If only he had said so when he was still in Government.

Anyway moving on, what of the arguments put forward by various Labour (and Plaid) politicians that you "can't cut your way to growth", implying that it is illogical to reduce government spending at a time of limited demand as that will only exacerbate the situation? Well this is what a favourite of this blog, Nouriel Roubini, the professor of economics of NYU, had to say about the cuts versus stimulus debate:

"The policy dilemma is that you are damned if you do and damned if you don't. You have large budget deficits, there has been a large monetisation of these deficits, near zero rates, Quantitative Easing [Ed: printing money to you and me]. On one side if you exit too soon in terms of fiscal stimulus and the recovery is still too weak there is a risk that you fall back into recession and deflation. On the other side, if you don't want to make that mistake, you say "no, lets maintain this stimulus", then deficits and debt are becoming already large - 10% of GDP deficits in most advanced economies, public debt rising towards 100% plus in the next few years, therefore either you have a fiscal trainwreck down the line, or you monetise these debts and eventually youre going to have high inflation and high loan rates are going to begin and crowd out the recovery. So its an extremely delicate trade off in this debate between growth now and fiscal and monetary austerity now."

As he says, its a very delicate trade-off with huge potential pitfalls on both side of the argument. Do you risk borrowing more to stimulate the economy and end up with large increases in debt and interest payments plus probably runaway inflation, or do you start to cut too early and plunge the economy into a double-dip recession and deflation? My own personal opinion based on all the evidence is this:

  • Even at the coalition's proposed rate of slowed down public sector spending, the national debt is set to double to £1.3 trillion. This already means that in five years time our public debt in real terms will dwarf the debt the country ran up in fighting two world wars. If the country was to borrow even more now to attempt to stimulate the economy what will be the resultant debt? What will be the annual interest payments on maintaing those levels of debt? How many generations will it take to pay it off? 
  • If we were to continue to spend, how much would the government realistically need to spend to adequately stimulate the economy into growing? This is an important question as there is no point in increasing borrowing for no outcome. The US last year implemented a stimulus package worth $800bn -- the equivalent of almost 5% of their $15 trillion GDP -- yet the returns have been meagre, so much so that Obama is now discussing implementing a second stimulus. Are we sure that we want to go down this path with no guarantee of returns?
  • What is likely to happen if we decide not to stimulate and also not to reduce public spending? In this case the likely result is that there will have to be either higher taxes and/or higher interest rates, which will lead to a new round of private sector job losses -- i.e. further turmoil in the wealth generating sector of the economy.
  • In addition if we continue to spend without any credible plan to pay back our debt, then we are likely to lose our AAA debt rating with untold consequences in terms of debt interest repayments.
  • Finally it is by no means certain that there are no more structural economic shocks in the pipeline - therefore it is certainly prudent to attempt to get our financial situation into better shape now in anticipation of further economic troubles.

Accordingly, on balance, I'm afraid that there appears to me to be little realistic alternative paths to that currently being adopted by the coalition government. 

UPDATE: Certain commenters have asked me to clarify how the UK compares to other international governments in terms of accrued debt. I am happy to oblige. Here are the OECD's figures for total government debt as a percentage of GDP for the most recent year available, 2009:

click to enlarge (Japan figure for 2008)

And to demonstrate the trajectory of growth of debt, based on the same OECD figures, the following chart illustrates how much debt has increased over the five year period of 2004-2009:

click to enlarge (Japan figures for 2004-08)
(source: here)

UPDATE 2: As luck would have it, the Economist published just yesterday the below chart comparing the budget deficits of various countries as a percentage of GDP:


So to recap these international comparisons: the UK is running the second highest budget deficit behind Ireland, the UK's debt has grown faster over the past five years than any other country bar Iceland, and the size of our debt is nudging towards that of Italy and Japan. I'm afraid I would find it difficult to argue against a period of prudence if we want to avoid a much more serious economic trainwreck down the line.

47 comments:

The Red Flag said...

Very well put together Druid - a handy source of reference in it's own right with excellent illustrations.

It also has to be said that many of these so-called 'cuts' are in fact cancelled projects that handed been funded to start with.

John Dixon said...

An interesting post, with a lot of research gone into it.

Clearly, one of the differences between us is whether it is more sensible to look at the debt/ deficit in 'absolute' terms or in 'relative' terms. Your early graphs show dramatically the difference between the two views, but you don't really justify your underlying assumption that it is more meaningful to use the absolute figures. (And I think I take issue with your use of the phraes "in real terms" - surely that means that you have to adjust for inflation etc., which I don't think you've done?).

I'm not sure that there is a 'right' answer here - and that's often the problem with any political debate involving statistics. Often, all the statistics are correct, and it's a matter of judgement as to which basis is the one to use.

The real question is whether the level of debt is 'affordable', and neither a comparison with absolute levels of debt in the past nor a comparison with GDP give a complete answer to that question.

Prometheuswrites said...

Excellent and thought provoking post Druid.

I echo the comments made above and ask a couple of more questions.

1. How does the UK compare to other international governments in terms of deficit and accrued debt?

2. What part does the credit cruch play in all this?

To expand - unemployment figures and claims for benefits haven't gone up to as great an extent as initially feared so this isn't driving the deficit. GDP obviously fell - that's why we were declared to be in recession, so we weren't manufacturing as much stuff or fiscally 'creating' wealth - so there's one of the drivers for the deficit (falling GDP).

I don't recall that the government went on an abrupt spending spree (apart from the banking bailout) - so the deficit levels were already contained within the system as it stood.

So where did all the deficit increase suddenly come from?
(the graph's show a marked increase at around 2007ish) - though the adjusted graph does show that public spending was on the increase from the early 2000's - however this wasn't as steep as at the increase at the beginning of the 90's under the government of John Major; indeed New Labour actually reduced the debt level when they took over government.

Now I know that they were committed to following the previous governments fiscal policies for 2-3 years after assuming government, but I also recall Brown as chancellor repaying most of the debt owed to the USA from after WW2.

I can't agree with you that when you say that it is complete nonsense that "The only reason that we have a deficit is because all the money was given to the banks" as we gave the banks an eye watering amount of bail-out money and then engaged in QE to stimulate GDP increasing activities.

What you say may be true in that it isn't the 'only' reason, but surely it must be a major contributing factor - or are you saying that we would be in the same position if the credit crunch had not happened.

As I sit here typing I can hear the report about the latest Irish bailout of their banks - "The Irish Republic reveals that it now faces a huge budget deficit - 32% of GDP - after the latest bail-out of its struggling banks" (BBC headline news)- so certainly in Ireland the bank bail-out is a contributory factor in their deficit. Why do you not think that the same applies to the UK, albeit to a lesser degree?

The Druid of Anglesey said...

John - thank you for your comments.

"And I think I take issue with your use of the phraes "in real terms" - surely that means that you have to adjust for inflation etc., which I don't think you've done?"

Sorry to disappoint you but I'm afraid that the figures used are indeed adjusted for inflation so as to represent real value in 2005 pounds. Accordingly the phrase "in real terms" is entirely correct. To compare non-adjusted nominal figures would anyway be entirely meaningless.

"I'm not sure that there is a 'right' answer here - and that's often the problem with any political debate involving statistics. Often, all the statistics are correct, and it's a matter of judgement as to which basis is the one to use."

You are correct there is no 'right' answer as economics is certainly not yet a science - if it was, we probably wouldn't be having this discussion! Also, as we are talking about public debt, it is difficult to avoid using statistics.

"The real question is whether the level of debt is 'affordable', and neither a comparison with absolute levels of debt in the past nor a comparison with GDP give a complete answer to that question. "

You are right. Accordingly I have now included a comparison of the UK's public debt with that of other countries (see original post). Again it is difficult to to make judgements at what level of debt it becomes 'unaffordable' leading to Greece like problems. For Greece it was around 125% of GDP, yet Japan has had much higher levels of debt for decades. I would however say that when a country (like the UK) forecasts that public debt (which has taken centuries to accumulate) will double in just five years, it is probably time to start reigning in spending. Furthermore, interest payments are also now becoming too large to ignore - it would be possible to make a case for trying to balance the books on them alone.

The Druid of Anglesey said...

Prometheus -

"1. How does the UK compare to other international governments in terms of deficit and accrued debt?"

Comparisons of debt levels in terms of % of GDP now included above. I think you will agree that the UK is at the wrong end of both graphs. The rate of growth over the past 5 years (second only to Iceland) is particularly worrying.

"I don't recall that the government went on an abrupt spending spree (apart from the banking bailout) - so the deficit levels were already contained within the system as it stood."

Here are the amounts Gordon Brown borrowed every year since 2001, the last time the books were balanced (source: http://www.guardian.co.uk/news/datablog/2010/apr/22/uk-deficit-government-borrowing):

2002 - £19bn
2003 - £34bn
2004 - £36bn
2005 - £41bn
2006 - £30bn
2007 - £33bn
2008 - £61bn
2009 - £142bn

As you can see the costs involved in bailing out the banks didn't kick in until 2008, by which time Brown had increased debt by approx. £193bn. Sorry to say but that is quite a spending spree!

"however this wasn't as steep as at the increase at the beginning of the 90's under the government of John Major; indeed New Labour actually reduced the debt level when they took over government. "

The rise in debt during the early 90s was to deal with the fallout following Black Wednesday and sterlings ejection from the ERM. Debt levels fell during the early years of Labours first terms as they were committed to follow Tory spending plans -- they started rising as soon as this was over in 2002. The difference between the rise in the early 90s and the rise from 2002-2007 was that former spend was to compensate for a crisis, the latter was just a spending spree.

"I can't agree with you that when you say that it is complete nonsense that "The only reason that we have a deficit is because all the money was given to the banks" as we gave the banks an eye watering amount of bail-out money and then engaged in QE to stimulate GDP increasing activities."

I think I have already satisfactorily demonstrated that Brown was running a significant deficit prior to Northern Rock et al. You are correct that lingering knock-on effects of the credit crunch partially account for the current deficit, but it is still incorrect to state "the only reason we have a deficit is because all the money was given to the banks". As I noted in my original post the size of the state has anyway been artificially increased over time beyond the public's willingness to pay for it through taxes and this is another prime driver of the current size of the deficit.

Jarlath said...

What is less discussed is the total debt of this country, private as well as public, it is a truly frightening figure. In 2008 according to Michael Saunders from CitiGroup it was 400% of GDP. see

http://www.spectator.co.uk/coffeehouse/3078296/the-true-extent-of-britains-debt.thtml

MH said...

A lot of what you say seems designed to support your contention that there is "little realistic alternative to the paths currently being adopted by the coalition government". But even if your analysis is correct, it still does not mean that the ConDem coalition is doing the right thing.

Yes, the deficit and overall debt needs to be reduced, but there are two main ways of doing it: the first is to cut public spending, the second is to raise taxes. The question for government is how to balance the two.

In rough terms, the ConDem's policy is that about 20% would come from raising taxes (predominantly the VAT rise, though offset by a reduction in income tax) and the rest would be by public spending cuts. I think that is the wrong balance and would look to get more by raising taxes. In particular, the proposed reduction in income tax (by increasing the threshold, but not at the same time increasing the basic rate) is particularly foolhardy. To me, it shows that the ConDem agenda is not merely to reduce the deficit/debt, but to change the balance of what we pay for publicly and privately as a matter of ideology.

Anonymous said...

It is worth noting that it has been calculated that if tax rises were to be responsible for plugging half of the deficit, it would mean that a Labour government would need to raise an additional £35 billion – the equivalent of 7p on the basic rate of tax.

Is that really what Labour, and now Plaid, want to see happening. try campaigning on that at the next Assembly election and see what happens.

Read Ed said...

Whilst we fiddle with a broken system, alternative economic models continue to be almost automatically dismissed as irrelevant because they are somehow too 'red'.

That is a shame, because the only conclusion that I can come to is that capitalism depends on ultimately impossible continuous growth (remembering we live on a finite planet) and just as much, massive hidden support from the poor taxpayer as the worst of Soviet Russia.

The system's broke. Why is there essentially no media coverage of the alternatives? House prices have been and continue to be so high that the young can't afford them without parental subsidy, if they're lucky enough to have such wealthy parents. Yet, we all clap when house prices go up, despite our relative position remaining unchanged.

Dylan Jones-Evans said...

Yet another incisive piece of work that blows apart the ill-informed commentary of other Welsh blogs regarding the deficit.

Nevertheless, I am disappointed, but not surprised,at the state of denial by the "opposition parties" over the state of public finances.

However, the cold bucket of water comes if you read yesterday's press release from the ONS, which stated that, at the end of March 2010, general government gross consolidated debt at nominal value was £1000.4 billion; equivalent to 71.3 per cent of gross domestic product.

As the ONS notes, "this is the first time general government gross consolidated debt at nominal value, has exceeded 60 per cent of GDP".

More relevantly, it states that "as a percentage of GDP, it has risen every year since end March 2004".

I think that explains simply and clearly how the financial problems of this country was started well before the last recession.

One other point - MH suggests that taxes should rise to deal with the deficit.

I just wonder what this will do to consumer confidence, especially amongst the three quarters of the working population that currently work in the private sector, and which has lost over a million jobs in the last two years?

TGC said...

"the private sector, and which has lost over a million jobs in the last two years?"

And which the government gleefully put forward as the sector that will pick up all those made redundant by cuts in the public sector. Very sensible plan!

The Druid of Anglesey said...

MH - Thanks for your comments.

"A lot of what you say seems designed to support your contention that there is "little realistic alternative to the paths currently being adopted by the coalition government"."

I'm afraid I take issue with that: I have presented the actual figures, gone out of my way to explain the policy dilemmas behind the cuts vs investment debate, then explained clearly why I think the coalition has chosen the right path. If you can put a different narrative on the figures I have presented, you are welcome to try and do so.

"I think that is the wrong balance and would look to get more by raising taxes."

This is a valid argument. My response would be that it was also in essence the choice presented (fairly timidly admittedly) at the general election. The result of the election may not have been clean cut, but by and large the majority of voters chose the cuts over tax rise option (and please don't reply that they didn't in Wales & Scotland -- the essence of Westminster elections is that they cover the entire UK).

As another commenter writes below Plaid Cymru & Labour are free to campaign in next year's Assembly elections that more of the deficit should be paid back through taxes rather than through cuts -- and I have no doubt they will make that argument. However here comes the rub: the Assembly has no tax varying powers, therefore it allows Welsh Plaid & labour politicians the freedom to argue as you suggest, but without the accountability of actually having to make the case for any specific tax rises.

I personally believe that the Assembly should be given tax varying powers (as I have written previously) if only to force Welsh politicians to be more accountable to the Welsh electorate.

Groundhog Day said...

It is a historical fact that when the Labour Party have come into power after the Tories they have mostly inherited a strong economy. It is also a fact that when the Labour Party leaves power it leaves an economic mess behind them as they have done on this occasion. Only this time it is an even more dire situation that the new government has inherited. Brown in particular got his hands on the country's finances, he made an absolute pig's ear of things and without the country being aware of his shortcomings as chancellor. No boom and bust? CRAP!And what happened to our country's gold reserves? He quietly had a car boot sale and flogged them without anyone noticing. He was an absolute disaster as a chancellor and even more of a disaster as PM. You can only pity poor Alaistair Darling having to clean up after Brown had caused so much havoc in the Treasury.
As for the country's deficit, well I thank the gods that we did not enter into the Euro, at least being in control of our own currency gives us more leeway in our economic planning otherwise we would surely be in the same boat as Greece and Eire. Whatever cuts need to be made we need as a nation to bite the bullet and accept our nasty dose of medicine. We also need to pray that the neanderthals in charge of our trade unions don't put a spanner in the works for purely political reasons, and if they do try it that the members see through their reasons because you can be sure that they will be chomping at the bit to get Red Ed into No10.

The Druid of Anglesey said...

John - I have just realised that I did not respond to your first point, namely "Your early graphs show dramatically the difference between the two views, but you don't really justify your underlying assumption that it is more meaningful to use the absolute figures."

The reason why I do not put too much credence on the first chart is because I do not think we can reasonably compare the debt run up between 1918-1945 with the current situation. The fact is that the debt run up during 1918-1945 was to deal with exceptional circumstances and was supported by exceptional deals, notably Lend-Lease during the war and the Marshall Plan afterwards. In ordinary circumstance those levels of debt compared to GDP would be entirely unsustainable - it is therefore dangerous for us to compare the the situation now with that in the 1940s and conclude that it is entirely possible for debt to be pushed up that high. I hope this answers your concern adequately.

The Red Flag said...

Groundhog Day - at least being in control of our own currency gives us more leeway

That is notional in this elctronic money transfer day and age. Should the EU or America for example suddeny ramp up their interest rates huge amounts of investment money will disappear out of the UK and on to them. Likewise should we rapidly raise ours we will become the destination of investment money. The fact we are in a diofferent currency is not that important for the next decade or so as we, the USA, the EU and the Japanese are by and large trapped into all doing the same whether we want to or not.

I see plenty of references to the ONS amongst these comments as though it were some sort of Holy Grail - it isn't, it ois a handy source of reference for averaged out data and can seriously mislead people and indeed be used to deliberately mislead them. I applaud the Druid for not using ONS data as 'reality'. Example:- according to the ONS a UK pensioner's average income is £564 a week (£29,000pa).

MH said...

Dylan asked me:

I just wonder what [raising taxes] will do to consumer confidence, especially amongst the three quarters of the working population that currently work in the private sector, and which has lost over a million jobs in the last two years?

As I see it, the big dividing line in this hardened economic climate is between those who have jobs and those who have lost, or will lose, them. Things aren't too bad for those whose jobs are safe. In particular, lower interest rates have lowered mortgage repayments meaning that they, if anything, have more money to spend.

My particular concern is that the ConDem government, by increasing the threshold without increasing the basic rate of income tax, has given all these taxpayers an extra couple of hundred pounds. I'm all in favour of taking those on lower wages out of income tax completely, but I question why we should give those on £20,000 or £30,000 an extra few hundred pounds as well. I agree fully with those who say we should fairly tax the rich and close tax loopholes, of course; but I think that ordinary taxpayers should pay more because the bulk of income tax comes from the many, rather than from comparatively few higher earners.

-

I am more bemused by your response, Druid, as I was only quoting the conclusion you yourself reached. I have nothing but praise for the way you've presented the figures. You have highlighted the scale of the debt/deficit problem, which is all well and good, but the big question now is how to deal with it.

My point was that the ConDem government's proposed solution of reducing it by such large cuts in public spending while at the same time reducing income tax was not only the wrong balance, but displayed its wider ideological intentions.

But of course the UK has got more or less what it voted for (if we leave proportional representation aside) and the result is that the better off will get richer, and the less well off will get poorer. I think that's unjust, and I will always stand against policies that widen the gap between rich and poor whether there's an election coming up or not. Despite your plea, it is always worth reminding people that most voters in Wales have a different attitude to these matters than most voters in England.

But, as you say, this subject will only be an aside in the manifesto for the Assembly elections, because Wales has no control over taxation or the level of deficit/debt. Like you, I want Wales to have greater fiscal autonomy, but I want us to have very much more than just the power to vary income tax. In general terms, I want to see lower business taxes and encouragement for businesses to re-invest rather than take money out in profits, but more redistributive personal taxation targeted to reduce the gap between rich and poor.

Prometheuswrites said...

I know some readers don't like the BBC as a source, yet I find this article makes for interesting reading.

http://www.bbc.co.uk/news/health-11445182

The first graph would appear to show that the only time that welfare spending has been restrained was during the New Labour tenure, before the crash.

The second graph shows that the biggest increases in Social Welfare expenditure were during the recessions of the 80's and 90's, both under Conservative administrations.

I'm not a great one for statistics as so much can be conjured up by manipulating the data or failing to label axis and graphs, or by distorting the scale of the axis or hiding their full extent (truncated axis) - and I could go on (and on) about this interpretive endeavour that tries to present itself as 'scientific'.

In fact I'm finding the plethora of all this information to be most confusing.

I'm going to go back to some 'common sense' approaches to the the economic situation, especially in regard to the nature of money, interest, debt, deficit and capital.

I'll comment further when I've made some headway in understanding how these factors impact on our current (novel) situation and what is being obscured by economic dogma.

John Dixon said...

"The reason why I do not put too much credence on the first chart is because I do not think we can reasonably compare the debt run up between 1918-1945 with the current situation."

And I'd agree entirely with that, and hope that my point didn't come across as suggesting that getting back up to those levels of debt compared with GDP would be a good idea.

My point was the more general one about whether the best comparator in deciding whether a given level of debt is the comparison with GDP or the absolute figure (and sorry for suggesting that you hadn't adjusted for inflation!).

I don't think either of them is the 'right' one; but I do think it's valid to have regard to both before coming to a conclusion. I don't think that you and I are terribly far apart on the figures, merely (!!) on the conclusions we draw from them.

Actually, I've never argued that the deficit does not need to be tackled; my point all along has been that we do have choices about methods and timescales. There is nothing inevitably correct about one particular answer. If I'm entirely honest, I don't know for certain that my answer is better than yours, although I believe it to be so. Unfortunately, we don't get to do it twice and see which works best, we have to select one and run with it. The figures are easy to agree; the choice made on the basis of them is not. My fundamental point is that the figures, in themselves, do not mandate one answer or another - it is our interpretation and opinions which lead to a conclusion.

John Dixon said...

Sorry, third paragraph should read:

My point was the more general one about whether the best comparator in deciding whether a given level of debt is affordable is the comparison with GDP or the absolute figure (and sorry for suggesting that you hadn't adjusted for inflation!).

Two words missed out

The Druid of Anglesey said...

MH - I apologise if I misunderstood the gist of your first comment.

"My particular concern is that the ConDem government, by increasing the threshold without increasing the basic rate of income tax, has given all these taxpayers an extra couple of hundred pounds. I'm all in favour of taking those on lower wages out of income tax completely, but I question why we should give those on £20,000 or £30,000 an extra few hundred pounds as well."

Your point, if I understand it correctly, is that those who remain in employment will enjoy a few extra hundred pounds a year of their own money, whilst those without jobs will lose out. It is probably unfair of you not to factor in IDS's welfare reforms which aim to remove the artificial barriers to work created by the current welfare system. If it works, and work is made to pay, then this could have a dramatic impact on those attempting to get back into the job market.

"Like you, I want Wales to have greater fiscal autonomy, but I want us to have very much more than just the power to vary income tax. In general terms, I want to see lower business taxes and encouragement for businesses to re-invest rather than take money out in profits, but more redistributive personal taxation targeted to reduce the gap between rich and poor."

And here we mostly agree -- though I would also plumb for lower rates of income tax in Wales along with the lower business taxes. The tax system should be set-up to maximise govt income whilst preserving all incentives for businesses and entrepreneurs etc.. There is a perfectly respectable school of thought which posits that reduced levels of taxation can paradoxically increase total tax receipts.

The Druid of Anglesey said...

Prometheus - I couldn't find any graphs in the BBC link you posted. Was it the right URL?

The Druid of Anglesey said...

John - thanks again for your input.

"I don't think either of them is the 'right' one; but I do think it's valid to have regard to both before coming to a conclusion. I don't think that you and I are terribly far apart on the figures, merely (!!) on the conclusions we draw from them."

I would agree with you - nothing is clear cut!

"There is nothing inevitably correct about one particular answer. If I'm entirely honest, I don't know for certain that my answer is better than yours, although I believe it to be so. Unfortunately, we don't get to do it twice and see which works best, we have to select one and run with it. The figures are easy to agree; the choice made on the basis of them is not. My fundamental point is that the figures, in themselves, do not mandate one answer or another - it is our interpretation and opinions which lead to a conclusion."

Very well put. You may think that it would be better to cut the deficit over a longer period of time or though increased taxation (I assume this is what you would prefer to see, though you don't write it explicitly). My opinion is that considering debt will double over the next 5 yrs even under the coalition's "cuts" plans, one can only imagine the effect on debt of further delaying deficit reduction. Anyway, as you say, we only get on shot at it -- lets see what happens.

PrometheusW said...

Sorry Druid

The correct url is:
http://www.bbc.co.uk/news/magazine-11443372

It gives the source as the ONS.

I can't say I thought much about the style of the piece, but the graphs are there.

and it's not about the total deficit, it's about 'welfare spending' - so I may be distracting from the main thread.

And thinking about it the figures will probably represent the big jump in unemployment related benefits in the early 80's and 90's, something that hasn't happened in this recession.

Anonymous said...

I think wage inflation in the public sector should be tackled hard, by a 10-25% cut in wages for those earning over 25K. There should be much smaller increments between scales. This to me is a better solution than increased taxation.

Better to have 2 people earning 15K each than one earning 30K?

I'm also interested in your 2nd graph - is there one that projects the data to 2016?

Anonymous said...

Anon 8:09

Initially my reaction was one of shock, but then on thinking about it, there may be something in what you say. However, let me re-direct you slightly, the idea comes from a programme I saw on the BBC about the boss of a Council refuse collection company. He successfully demonstrated that the company could be run without all the managers we deem it seems necessary these days.

More Indians less chiefs indeed.

avatar said...

Whilst I can see the argument for a pay freeze in the public sector for a defined period, to ask people to take a substancial pay cut would be unfair, after all they would have based many of their decisions on the wage that they recieve, morgages etc.

Prometheuswrites said...

Reasonable article here from the Guardian:

http://www.guardian.co.uk/politics/2010/oct/02/john-lanchester-comprehensive-spending-review-george-osborne

It highlights the potential extent of the cuts in the emergency budget of October and concludes that the end effect will be of a more unequal society.

I've written before about the dangers of the growing wealth gap and the unrest and resentment it produces, especially when it is those who have done least to create the problem who suffer most; and those (investment bankers, imprudent polititians and assorted financial wizzers) who have most contributed to the crisis who suffer least.

BYW. Can anyone enlighten me on the amount (%) that public sector pension schemes are costing/contributing towards the deficit.

The Druid of Anglesey said...

Prometheus

p.102 OBR June Report:

Net public service pensions:

2009 - £3.1bn
2010 - £3.1bn
2011 - £4.0bn
2012 - £5.1bn
2013 - £5.8bn
2014 - £7.3bn
2015 - £8.9bn
2016 - £10.3bn

Jarlath said...

I’m no expert on pensions, but I recall at one time in the early eighties I think it was, when a pension advisor would visit my dad and advise him how to invest. I recall at the time how he would boast that Barclays pension pot was so large they did not know what to do with the money.

How times have changed, I used to work in local government, and I used to contribute towards my pension. Of course, I cannot answer for the pension of the civil service, whom I’m informed is far too generous. However, lets not forget that in terms of local government, the vast majority of workers will not be high earners, and the pensions that they receive will be relatively small.

I also remember a time when during the Thatcher government, people where advised to opt-out of the local government pension schemes, because it was claimed you could get better provision elsewhere, and sadly how wrong that was, and the need later for some, to make additional contributions just to ensure a decent pension when they retired.

Don’t get me wrong, pensions are something we need to seriously address, working longer for example, but lets not remove a decent pension because the private equivalent cannot match it. All of those who have worked honestly throughout their lives deserve a decent pension, lets aim to improve all pensions, rather then aiming to make all pensioners poor.

Now how much pension do MP’s get?

Jarlath said...

And I nearly forgot the time when local government pensions had so much surplus they where advised by central government that the Council could reduce if not stop their contributions to the pension fund, but later when the markets collapsed and their was a shortfall, the Council’s had to make substantial increases in their contributions. Now I wonder which party was in power then?

Jarlath said...

P.S I'm no expert on spelling either - sorry

The Red Flag said...

Jarlath said.... Years ago the public sector were low paid hence one of the reasons that they were allowed to retire earlier, gold plated pensions etc etc.

That is not true today.

The public sector employs as follows (expressed as a % of available workforce actually in current employment)

England 20.1%
Scotland 25.2%
Wales 26.6%
N Ireland 29.7%

Public sector wages on a non-managerial like-job for like-job basis are approx 33% higher than private sector in NI and Scotland and approx 12% higher in England & Wales.

So nowadays for ordinary workers the private sector pays less, works longer and the workers have make their own pension provision.

Jarlath said...

Putting aside what I said was:

“However, lets not forget that in terms of local government, the vast majority of workers will not be high earners, and the pensions that they receive will be relatively small.”

We are being told that the private industry will step up to the plate and stimulate the economy, which by Red Flags reckoning will provide jobs that pays less and require them to works longer and when they retire have a small pension provision. And whilst the shareholders make hay with the profits, guess who’ll be paying the for the shortfall to ensure they have a decent income in retirement, I guess that’ll be the government.

Of course we need to address the pension issue and the likely shortfall in funding in both private and public funds. As I said I’m no expert, all I am asking is can we at least ensure that any hard working and honest worker gets a decent pension on retirement.

The Druid of Anglesey said...

Jarlath -

"And whilst the shareholders make hay with the profits, guess who’ll be paying the for the shortfall to ensure they have a decent income in retirement, I guess that’ll be the government."

You are getting dangerously close to damning profit making companies as somehow being 'socially useless'. Remember that profit is exceptionally important: it pays the salaries of workers, it provides tax income which therefore pays for all the public services and public sector jobs, it funds R&D to make better products or services which in turn generate more jobs, it pays dividends to shareholders (both individual and pensions funds which then pay for all our pensions) and whatever is deposited in banks is then lent out several times over thanks to fractional reserve banking system providing needed investment for other businesses.

Jarlath said...

Druid as I have said on numerous occasion I’m no economist.

Sky News Online today has an interesting report by New Economics, in which they set out the argument why the banking system needs to be reformed.

Of note is the £1.2 trillion of taxpayers’ money being put at risk to bail out the banking system..

See
Sky News: http://tiny.cc/qn5rb
and
www.neweconomics.org/publications/where-did-our-money-go

P.S £1.2 trillion as the total of investments, guarantees, loans and insurance schemes established to support the banks

Prometheuswrites said...

I think that this report today on an upcoming Panorama programme relates to this thread.

http://www.bbc.co.uk/news/uk-11452857

"Customers losing thousands on pension fees, commissions"

In response to your remarks about 'damning profit making companies as somehow being socially useless' I would put this forward as an example of such.

I have no problems with making profits, but I do feel that not all profit making enterprises are socially acceptable. (Landmine/cluster bomb manufacturers spring to mind in the manufacturing sector - ((not that they get deployed on British soil))

I have doubts about those financial enterprises that generate profit, (not by manufacturing useful 'stuff' or by those industries providing support services for such); (but) by manipulating fiscal data or trading in 'invisibles', or in commodities that add no value to the material capital goods that have been produced/manufactured.

Regarding the Panorama article; does anyone know who manages the public sector pension funds?

Does this suggest that a large portion of the costs of public pensions, (figures of these were given by the Druid in an earlier comment on this thread), will be taken by the pension funds responsible for ensuring a sufficient rate of return on the investments?

Or in other words, How much of the cost of public pension goes to the pension fund managers and how much profit is it acceptable for them to make (75% of investments, on the figures given for a HSBC pension plan) - so presumably the remaining 25% plus interest/dividends is what pays your pension!

No wonder my personal pension 'nest egg' is getting smaller.

The Druid of Anglesey said...

Prometheus - the state pension is not a managed fund, It is entirely funded by taxation -- which is a big problem considering that due to demographic changes people are living longer and less younger people are in work to support them.

When the state pension was first introduced after the war, the average life expectancy was just 65 -the year at which men receive the pension! Now average life expectancy is 79 yrs.

Prometheuswrites said...

I've been looking at the graphs in the main post trying to understand them.

(The truncated y-axis on some does tend to exaggerate the differences)

As I understand, 'debt' is the total accumulative amount owed over the years.

'Deficit' is gap between money produced and money spent and is covered by borrowing when spending exceeds earnings and we have to pay interest on the borrowing.

I get confused when graphs showing debt and deficit as a percentage (of GDP) are compared with graphs showing absolute values (of GDP).

So while Ireland has a huge % deficit compared to UK it actually has a much smaller debt in absolute terms, due to the big difference between the Irish and UK GDP.

The total USA debt must be gigantic given their GDP.

Can anyone tell me to whom we all owe this money ?

Who is holding the chit?

The Red Flag said...

Prometheuswrites, do you mean public sector employees pension funds? Or the state pension scheme?

PrometheusW said...

PS. I know that there are 'sovereign funds' such as the ones of Norway, The Emirates and Saudi Arabia, but I wouldn't have thought that even all these huge accumulated wealth funds were sufficient to cover the global debt borrowing requirements of the industrialised nations during the crunch.

PrometheusW said...

Red Flag:

Can you explain what the difference is between these?

I have to admit to not understanding financial vehicles that well.

Are they managed by different fund managers?

PW said...

PS.
Sorry I do know the difference between the public sector employees pension and the state pension scheme.

The first is the pensions that public employee's receive from their pension fund contributions, and the other is the 'old age' pension that we all receive upon retirement.

What I don't understand is how these funds are managed or even if there is a fund for the state pension scheme.

PW said...

Sorry Druid - I missed your input. Thanks for clearing that up for me.

Yes, changing demographics increases the expenditure while reducing the income.

The (unpalatable for many) solution would be to increase the age at which pensions start to be paid.

However this does challenge one of the many 'tacit' beliefs about how we function as a society.

The Druid of Anglesey said...

Prometheus - The coalition has already indicated that they will raise the state pension age for men to 66, possibly as early as 2016.

The current scheme is unaffordable in the long term and needs to move towards a defined contribution scheme (i.e. one in which the employer and employees' contributions are invested in a mix of equities, bonds and cash. On retiring, the value of the account is available to provide a pension and potentially a lump sum). The problem would be that in the transition period, the NI payments of those moved to a DC scheme would no longer be available to pay the pensions of those currently unemployed, meaning something has to be cut somewhere (again!) to pay for current pensioners. It would be a very brave government indeed that chooses to grasp this particular nettle - but the longer we leave it, the more pain to come.

Incidentally, my personal preference would be for something similar to Singapore's Central Provident Fund. See here: http://en.wikipedia.org/wiki/Central_Provident_Fund

The Red Flag said...

PW
There is no 'fund' as such for the State Pension. Although notionally it is funded via NIC along with the rest of the welfare state liabilities, NIC does not meet the requirement and so it is a paper exercise and it all comes from the general taxation pot. The 'Fiund Manager' therefore (there isn't one really) would be the Chancellor.

Public Sector Pensions come in various guises - national such as the Civil Service, the Armed Forces etc and Local Government employees. Some are dealt with the same way as the state pension, some - such as the Armed Forces - held in other budgets (the Forces is held in the Defence Budget) and some have proper fund mangers for example the nurses and local councils. These are run to varying defrees odf efficiency and you would have to look at each one individually.

For exanmple the NHS pension scheme has horrendous paper liabilities underwritten by the tax-payer (as does the postal workers), but the nurses pension scheme is well funded and more than able to cover it's liabilities.

The Druid is right that we are probably going to have to an income-related DC scheme over time and phase the State Pension out again over time.

Being already in receipt oof an Army pension and marching towards my state one, I contribute to the company's DC scheme because I willbe receiving to much to qualify for tpensioners tax credits. Personally I believe there should be some sort of 'agency' co-ordinating this as people routinely move jobs and as a result end up in several and more DC schemes because most employers have their preferred fund. As you change employers, your previous one becomes 'closed' and so you could end up with half a dozen or more. I believe there should be some sort of Agency that both regulates the DC schemes properly but also allows you to move the schem from one employer to another as you change jobs and even make one-off payments should you have a bit of spare cash now and again and also put into should you go self-employed for a couple of years. You shouldn't have to be constantly closing funds and opening new ones as you move around and as a result having to remember where they all are.

Anonymous said...

PW

Who we owe the money to

see

http://www.debtbombshell.com/bond-market.htm

An intereting web site overall.

Avatar said...

First point the countries public sector debt is too high (as expertly explained by the Druid above) and needs to be reduced.

Who is to blame for the current deficit level, well that is mainly down to the previous government for spending too much, and for depending on forecast that where overoptimistic. Then there was the recession preceded by the near collapse of the banking system (and Gordon Brown and his much vaunted relaxation of banking rules are somewhat to blame for that).

However let us not forget even Labour had they won the election would by now be explaining cuts to government spending.
See http://news.bbc.co.uk/1/hi/business/8570775.stm.

As can bee seen Labour proposed to reduce the deficit more slowly and over a longer period, their gamble being that the so called ‘public stimulus’ would enable the economy to recover and with it government income as a result.
At the time many experts, including the EU, where warning that the reduction in the deficit needed to be done quicker.

This brings us to the Coalition Government budget reduction plans, which is based on larger cuts to reduce the deficit quicker, as the IMF put in their recent report:

The fiscal mandate of balancing the cyclically-adjusted current budget by 2015/16 is appropriately ambitious. The plan’s credibility has been bolstered by a frontloaded path that achieves the mandate one year early and by a suitable mix of concrete spending and revenue measures.

See: http://www.imf.org/external/np/ms/2010/092710.htm

One key element of the Coalition Governments plans is that the jobs lost to the public sector will be replaced by jobs in the private sector, the so called ‘third way’. However as the deficit reduction programme will in the short term lead to a stagnation of the economy, then neither should we expect there to be a quick reduction in the number unemployed.

Lastly let’s not forget that the last recession was preceded by a near collapse of the banks, and that was because they lent to much and took on to much bad risk. In other words, it was recession born out partly by too much government borrowing but mostly because banks were lending too much money to poor risks, through a system of bundling debt that eventually resulted in no one being exactly sure what the total liability was.

The Coalition Government is addressing the government deficit, what is also needed is a thorough reform of the banking system, not only in this country but world wide.

To conclude yes we need to reduce the deficit, but all three main parties where proposing that in the run up to the election. The Coalition Government plans are ambitious, and if they work, all of us will benefit in the long term.

However, lets recognise at least that they were other budget plans to reduce the deficit we could have chosen, and not as trumpeted by some, that the Coalition Plans were the only plans to reduce the deficit.