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OBR report: Difficult decisions ahead

Stephanie Flanders | 13:10 UK time, Tuesday, 15 June 2010

So much for the numbers. What is the government going to do about them?

At first glance, you might think the OBR's report had not advanced the argument about the deficit one inch.

George OsborneIf, like Mr Osborne, you have long believed in more rapid deficit cuts, you will have found plenty of supporting evidence in the OBR report. But as we have seen, if you're like Alistair Darling, and you have always thought that faster cuts were risky for the economy, you might well decide the weaker growth forecasts in the OBR report had rather strengthened your case.

But it's not just a question of paying your money, and taking your choice. There is real information in the report that sheds light on the difficult decisions ahead.

Borrowing is lower than we thought - about £3bn lower by 2014-15. The key is that the OBR thinks we have less room to grow our way out of that debt than before - meaning the structural hole is that much bigger.

As a result, the IFS calculates that the permanent hole in the budget associated with the crisis and the recession has risen from 4.7% of GDP, or £69bn in today's money, to 5% of national income - or around £74bn.

It's not the monster revision that some ministers might have led you to expect. It's also about half the average forecasting error for predicting the overall deficit - let alone the "structural" hole.

But remember - these are central forecasts. Where the borrowing numbers are concerned, moving away from a deliberately cautious approach is said to have roughly offset the impact of lower growth.

Given that Mr Osborne is supposed to be aiming at a more than 50% chance of hitting his target - you might expect him to tighten policy by more than £74bn between 2011 and 2015 - meaning a tightening of more than £24bn on top of the £51bn of cuts and tax rises that Labour has already put in place.

To "over-achieve" his target of balancing the structural current deficit - by the same margin that Mr Darling planned to achieve his deficit target (in his case, over a longer time frame), the IFS say that Mr Osborne would need to tighten by an extra £34bn between now and 2015 - or £85bn in all.

Is that do-able, without raising taxes? The IFS says it is. But when you look at what it would actually involve, it looks like the technical definition of the word "do-able" , not the political one.

Since taking office Mr Osborne has repeated his desire to see £4 of spending cuts for every £1 in tax rises. With the £85bn target, that would mean £17bn in tax rises and £68bn in spending cuts. And, as it happens, Labour had already announced £18bn in tax rises. So, in theory, the tax part of the job is done. As the IFS says "that suggests that a 4:1 ratio...can be brought about without any further net increase in taxes."

But - and it is a big but - that statement doe not take account of the government's many other pledges - for example, to offset the employer piece of Labour's National Insurance rise, and raise personal tax allowances.

If they go ahead with those, they would need to find other offsetting tax rises. And the chances are that capital gains tax isn't going to be enough.

Some would also question the feasibility of cutting spending by £68bn in a single Parliament. Because other spending - on debt interest and the like - is going up, it would mean an overall cut for departments of £78bn. And, that would not be shared equally because of the departments being protected. For the unprotected departments - we're looking at cuts of £82bn by 2014-15 - meaning the average budget of these departments fall by nearly a third.

Alternatively, they could stick to the spending totals helpfully provided by the OBR - which show departmental spending falling by £39bn, or 10% over the period. That is more in the ballpark that's previously been discussed.

As I mentioned last Thursday, there's a long list of think tanks queueing up to tell the Treasury how to cut the remaining £30bn from the welfare budget. Reform joins the list tomorrow, with more than 100 pages of its suggestions for next week's Budget and the spending review.

The IFS says that "such welfare cuts are likely to seem prohibitively large". The betting is therefore that Mr Osborne will announce a mixture of all all the "tough choices" next week: faster spending cuts (including departmental and welfare spending) and, new tax rises, with all eyes on VAT.

This may well be the best guess of what he will do. But remember that he has just announced a root and branch, fundamental re-think of what government does and how it does it, including the benefit system and the newly topical issue of public sector pensions and pay (which I'll discuss properly sometime soon).

Remember, too, that Mr Osborne and his advisers have always been much taken with the overwhelming historical evidence suggesting that raising taxes to cut large deficits can damage economic growth - whereas spending cuts do not. In fact, this same evidence suggests that cuts can even help, by supporting market and business confidence.

You may not endorse these arguments. There are those who say the research doesn't apply in this era of banking crisis and deeply fragile global demand. The point is that Mr Osborne does. And so does his team.

Given all that, it's possible that Mr Osborne really means it when he says he will do all he can to avoid an increase in VAT - and that he really does not want to prejudge the results of the spending review by saying, in effect, "You know what? We're going to avoid some of that fundamental re-thinking of middle class benefits and the like, and raise VAT instead."

If he wants to avoid that, we might only get isolated VAT rises next week - perhaps extending VAT to financial services, or other areas, to raise several billion pounds. We might also get a promise - or threat - to raise VAT, or introduce a carbon tax, on a pre-established timetable, if certain stringent targets for the deficit and/or spending are not met. That's on top of some pretty eye-watering news on pay for public sector workers and probably much else besides.

Then again, he may decide that the international clamour for deficit plans - plus the OBR report yesterday - give him enough reason to kick off this era of tough choices by raising VAT across the board. But if so, it will be interesting to see him make the case.

Comments

Page 1 of 3

  • Comment number 1.

    So will he go for a 10% cut in all civil servant and LGO wages (above 15K) and an end to funded retirement before 65 in the budget?

    I doubt it somehow. Save a lot of money though especially with all the wages saved during the strikes.

  • Comment number 2.

    Hi Stephanie,

    2 questions, maybe for a future blog.

    1) Could you go into some detail about the interaction between growth and inflation? They seem to act in opposite directions. Is the growth forecast cancelled out by inflation? What is "real terms"?

    2) The government seem to borrow money like it is a finite resource, however they own the printing press. While it might devalue the currency a bit, why all the fuss about credit ratings and being controlled by various financial bodies, when they could just print more of it? In fact, why do the government borrow at all? can't they just print some in hard times and compost some money in the good times? that way we control our own finances as a nation completely.

    Cheers,

    Mat.

  • Comment number 3.

    You may not endorse these arguments... The point is that Mr Osborne does.

    That's the trouble with economics. If David Willetts proposed to get us into space by pointing our rockets downwards, the BBC's science reporters could, and would, criticise him with impunity. When George Osborne proposes the economic equivalent, it's all on-the-one-hand-this-on-the-other-hand-that.

  • Comment number 4.


    VAT up to 20%
    Long term aim to move balance of tax to tax on expenditure not income.
    Employers NI rise scrapped.
    Basic rate of income tax down 1p.
    Top rate of tax to 45% with goal of 40% in 2011.
    CGT for non business assets to 40% with re-introduction of indexation relief.
    Significant cuts to welfare budget with particular commitment to end unsustainable approach to invalidity benefit and public sector pension costs.

  • Comment number 5.

    You are right Stephanie that it is all about underlying assumptions. The Government believes that the Public sector is somehow "crowding out" the private sector. In many outer estates in our cities there are shopping parades that consist mainly of local housing offices and other local authority functions, plus charity and voluntary sector projects. The idea that if these units are vacated they will suddenly be filled with butchers, bakers and candlestick-makers is complete eyewash. We already have the most "flexible" labour markets in Europe where it is easy to take on EU workers and easy to sack British ones. If there was any evidence of pent-up private sector activity it would be happening already. It is not. In many areas outside of London it is only public sector employment and expenditure that is staving-off total economic collapse.

    Nor should we overlook the fact that the public Sector is a massive customer for the private sector. All those external contracts are going to be the easiest things to cut, so the private sector itself is going to be running backwards rather than stepping forward boldly into the new opportunities.

    Zombie economy here we come!

  • Comment number 6.

    I think that you are right Stephanie that there are a lot of possible conclusions from the figures published by the OBR.However you seem keener on theoretical constructs such as structural deficits than I am. I notice that the notayesmanseconomics web blog thought that in some ways the figures reflected well on ex-Chancellor Darling as well as comparing the old to the new figures "One might wonder as they are so similar as to what the point was"

    On another tack I notice that we have had inflation figures out today and particularly enjoyed the notayesmanseconomics view on these.

    "However the question for the Monetary Policy Committee is based on 3.5%,3.0%,3.4%,3.7% and now 3.4%, these are the figures for CPI inflation so far this year and the question is from David Byrne of Talking Heads who in one of his songs opined “how did I get here?”"

    Well how did we?

  • Comment number 7.

    Notice how when inflation falls how all the doom-mongers bleating for interest rate rises go back into the woodwork. Caledonian Comment

  • Comment number 8.

    I’m not sure whether I favour tax rises or spending cuts.

    So far in our family we’ve cut the beer, chocolate and curry budget.
    The constantly ‘doing rooms up' budget has thus far escaped.

    I think a little bit more of a squeeze on the taxation front and we may have to delay the pre programmed ‘doing up’ of the next rooms on the list.

    Which means I can wile away my weekends on somewhat more relaxing pursuits, such as watching cricket.

  • Comment number 9.

    As long as those earning above the 40% tax rate don't have to pay National Insurance on that part of their earnings - after all that would be so unfair

  • Comment number 10.

    Actually Stephanie it doesn't matter what Alistair Darling thinks. He and his chum Gordon had their chance and blew it creating the mess we're in now. Well to be more accurate, it was Darling, Brown and all their pals in the City of London.

    What's happening now is that the coalition is attempting to prepare the economy for some sort of come back once global conditions improve. Sadly though the City and the banks in particular are already beginning to do their own thing again so unless the Govt finally decides to get it/them back under control we'll be stuffed again in a few years anyway. Either that or the people will do it for them!

  • Comment number 11.

    #2, Mat: "The government seem to borrow money like it is a finite resource, however they own the printing press. While it might devalue the currency a bit, why all the fuss about credit ratings and being controlled by various financial bodies, when they could just print more of it?"

    Are you for real? One word springs to mind: "Weimar".

    You can't print your way out of it, you have to earn your way out of it. That means providing other countries with things that they want to buy, in exchange for money.

    Trying to print your way out of it is like your own household declaring that you are going to use leaves for currency and, look, we're all billionaires. You've still got to have something of value to the outside world to pay your bills with and buy your food.

    There is no easy option, nice though it would be. Labour borrowed heavily from the future to finance the present. Well, the future has now arrived and it's time to pay for it.

  • Comment number 12.

    #5 "it is only public sector employment and expenditure that is staving-off total economic collapse".

    Whilst I see this logic and, to a certain extent agree with the Keynsian nature of it, I would argue that the "staving off" is simply delaying it.

    We can either have the "correction" (a euphemism for very hard times0 voluntarily or we can have a "sharper correction" (a euphemism for IMF-imposed hell) under compulsion.

    All we can hope is that we can rise from the ashes, but the debt-fuelled party is over.

  • Comment number 13.

    £4 spending and £1 tax?

    But what does this mean? Below is an outline of a calculation that tries to show what it means.

    Let us first try vat up to 20% and a penny on income tax to get a feel for what may happen. all figures from "public_finances_databank.xls" pub HM Treasury

    VAT and income tax + NI (80bn + 250bn) = 330 (out of total 550bn)
    vat up 2.5% to 20 % = 92bn, 1 p on income tax & NI = 262bn
    Total of 354bn (or a rise overall of 7%)

    That implies a cut of 120 bn in expenditure - clearly a bit high so let us try again!

    Say 2.5% on vat only - that implies an expenditure cut of 60 bn

    That is a bit more rational that would be a ten percent cut in the pay of civil servants.

    This would together benefit the public finances by 72 bn (This is about half of the annual borrowings.)

    I therefore conclude from the very rough figures above that to fix the deficit we would need a 20% cut in civil service pay and 2.5% point rise in VAT to 20% and 1.5 p on income tax.

    I don't think cuts in welfare will actually work unless we can really put up with people starving and on the streets.

  • Comment number 14.

    "But remember that he has just announced a root and branch, fundamental re-think of what government does and how it does it, including the benefit system and the newly topical issue of public sector pensions and pay (which I'll discuss properly sometime soon)."

    Public sector pensions should have been reformed a long time ago. Funding pensions is a long term issue and needs to be taken out of the hands of political parties who can't plan for longer than 5 years at a time. Given the scale of the problem, increased employee contributions are unlikely to be sufficient. Young people already have to pay for their own degrees. We shouldn't expect them to pay for our pensions too.

  • Comment number 15.

    #7. CalComment wrote:

    "Notice how when inflation falls how all the doom-mongers bleating for interest rate rises go back into the woodwork."

    I disagree: the inflation figure is 'fiddled' as it does not adequately take into account the inflation in house prices - where a large proportion of the fake extra money has vanished! Rates should be higher NOW.

  • Comment number 16.

    "Are you for real? One word springs to mind: "Weimar"."

    Thus demonstrating your lack of understanding of the issues.

    The Weimar republic was paying off debts in foreign currency (gold primarily). The UK is paying of debts in a fiat currency that it owns. The two are not comparable, any more than the UK is comparable with Greece (or with Iceland, which did have lots of debts in foreign currencies).

    Sovereign parliaments do not have to fund expenditure in their own currency, can never 'run out of money' and don't have to borrow.

    That's a lot of freedom that the capital market lobby has tried to restrain - primarily so they make more money out of the economy. Hence the bond funding nonsense, plus the erroneous constant comparison of government with a household - conveniently forgetting that a household has no power to enforce taxation.

    However all this power is still dangerous. Although the government can never run out of money, it must use that flexibility wisely. You can cause inflation if you spend money beyond the capacity of the economy to absorb it.

    But with so many unemployed and underemployed, there is a way to go before we should have that problem.

    Certainly printing money and giving it to banks so they can pay out bigger bonuses is a very stupid idea. I can't understand what the Governer was thinking.

  • Comment number 17.

    Irrespective of what comes out in the budget, keep your eye on all the other bad news that gets released that day. It's going to be the opportunity of a lifetime.

  • Comment number 18.

    "Trying to print your way out of it is like your own household declaring that you are going to use leaves for currency and, look, we're all billionaires. You've still got to have something of value to the outside world to pay your bills with and buy your food."

    However if the government decided that leaves from a particular tree they owned were the currency and taxed you in leaves, then you would start selling your efforts for those leaves (unless you like prison food). Everybody in the country would stop using sterling and start using leaves, and you could buy food with those leaves. We'd have bank accounts denominated in leaves, so that we could expand the currency without killing the tree.

    That's why it's called a fiat currency. The money has value by decree of parliament. It is the ability to tax and enforce it that gives any currency real value.

    See this article for more info: http://bilbo.economicoutlook.net/blog/?p=1075

  • Comment number 19.

    Discussion of options for reducng the deficit always focuses on the role of tax rises and spending cuts.
    An additional boost to the public finances could be provided from asset sales (as in the privatization boom of the eighties). The motorway network for example is a candidate for transfer to the private sector.
    (the motorways alone have been valued at £85 billion)

  • Comment number 20.

    Inflation is on the way down, so the doom mongers are wrong (as usual)

  • Comment number 21.

    If they tax me more, the family wouldn’t be able to press me into buying things that I didn’t really want to buy anyway.

    In fact I wouldn’t have to spend time shopping for them in the first place, or trying to figure out how to make them work, and then taking them back when they broke.

    For example, a power washer, you spend time buying one, then you spend time blasting the hell out of the block paving to get rid of the moss.

    Then you spend time going buying sand to replace all the sand you’ve just blasted out, which you then have to sweep in, and having probably got around 90% of the job done, the power washer packs in and you have to take it back.

    Maybe a bit of austerity might not be such a bad thing for the average working Joe.

  • Comment number 22.

    Public Sector pensions need to be altered due to the fact that the contributions cannot fund the benefits, largely due to longer life expectancy

    It is a mathematical equation, pure and simple

    Due to the recession cuts are needed in spending not yet more taxes, although some are in the pipeline, and some are going to happen of a 'more modest nature'

    Getting this crazy deficit under control is essential not in any way optional

  • Comment number 23.

    How much of this deficit is caused by the bank-bail out? and how much is due to the gap between spending (on "normal" services like NHS, Defence, benefits, etc) and the reduced tax-take due the recession?

  • Comment number 24.

    "The Numbers"!!!!!!

    Oh' ah Yes, with you yet again - The Numbers, where for it seems like ALL we have been doing in one shape or another form over the past 2 Years is to keep producing amost Daily this, that or another Set of Figures and Numbers to try and draw an ever increasing circle around ever larger growing Holes IN ALL the Public, Private and Personal Finance Sectors, but alas with somehow to NO avail in moving forward, or upwards, for being stuck in Quick - Sand and sinking ever lower every Day.

    So therefore, we now wait yet still again for the next upcoming Budget to shine a light where no lights have been seen before in some further hopes that without the aid of a Crystal - Ball we will be having a Street - Party at the end of this CON-DEM Parliament to hail back in again the return of those once Good - Times.

    For indeed, even I had a dream last Night whereby Cameron, Clegg and the whole Government, along with Bankers and ALL the Elite Millionaires got stranded together upon a Desert Island, while the People back in the UK were let out of their Daily shackles to find that ALL this Doom and Gloom talk about Economocal Melt-Downs had gone away, - But then I woke up to the sounds of further Crisis in the UK Ecomony whereby whatever the CON-DEMS do next will lead us towards even more failures.

    So therefore, will Osboune be able to fix anything. WELL **?, as the Country goe's further over a Cliff.

  • Comment number 25.

    I just wanted to say thankyou for another great blog, you always manage to cut through all the economic blather and present very complex issues in terms that schmucks like us can understand (i suppose that's why you're a journalist, but still- many of your ilk seem only to obfuscate things further).

  • Comment number 26.

    "....fundamental re-think of what government does and how it does it, including the benefit system and the newly topical issue of public sector pensions and pay (which I'll discuss properly sometime soon). "

    When you discuss this topic 'properly' perhaps you will be able to explain to me the following; once someone in the public sector retires at normal retirement age (and there is a significant proportion that retire earlier than that) which is currently, typically 60, then the very first year that they are retired they get back more from their pension than they have ever paid in and every single year of retirement after that is profit (trust me you can work it out mathematically!). They will receive, typically, over 20 years of 'profit' from a public sector pension with no investment risk. The typical public sector pension is valued at c.£4,000 p.a. and yet to provide this pension with index linking, spouse's pension etc. would cost over £100,000 on the open market. However on the open market the Prudential (Britain's largest annuity provider)deals with pension pots with an average value of only £30,000. How fair is that?

  • Comment number 27.

    The worries about the Government (rather than the banks) printing money is rather neatly covered by the ideas of the Bank of England Act. In fact, it rather neatly suggests a route to avoid making cuts on a schedule dictated by others. Which gives the Government more control over when, where and how it makes cuts. As it stands Cameron will make the Cuts the City dictates. The OBR is a formality to dress it all up in appropriately "serious" terms so the electorate does not question too closely.

    Personally, the idea of cuts seems less and less attractive given that there is a legislative framework for both avoiding the need and increasing the common wealth. Cameron could prefer cuts now. That would be an ideological program aimed at entrenching banking practices. There might be economies that can be made. But they should be for the benefit of the taxpayer not the shareholder.

    The proposed bank of England Act is something that Parliament could debate at the Emergency Budget. After all: Dave seems to think it is an emergency.

    link: http://www.bankofenglandact.co.uk/

  • Comment number 28.

    I don't see Osborne doing anything with VAT. It isn't the right thing to do in economics terms - raising prices when you want consumer confidence to increase is daft. It is also politically inept since his party will be left open to abuse.

    I suspect we will see a lot of public sector cuts and not much more.

  • Comment number 29.


    Is it me, or are the Upper Middle Class denizens of BBC TV and radio news/current affairs quite sanguine about the destruction of the welfare state and the impoverishment of hundreds of thousand of people in Inner London, the North, Scotland Walres, Northern Ireland............

  • Comment number 30.

    Perhaps one set of cuts that would so;ve many problems would be for the government to set an example and cut MPs salaries and benefits first.

  • Comment number 31.

    20. KevinB

    "Inflation is on the way down, so the doom mongers are wrong (as usual)
    "

    CPI Inflation 3.4% RPI Inflation 5.1%

    Great figures huh?..... the "doom mongers" can clearly see then numbers actually in front of their eyes, and understand the implications. Others seemingly cannot...

  • Comment number 32.

    30

    MPs salaries should most definitely NOT be cut

    MPs pension scheme should most definitely be cut

  • Comment number 33.

    30

    5% cuts to ministerial salaries and wage freezes for the full 5 year term have already been implemented. Another pledge was to reduce the number of MPs by 10%, although I guess this will have to wait until the next election. It is small beer in terms of the deficit, but does have some value as a symbolic gesture.

  • Comment number 34.

    Sir,

    No one really gets to grips with how we can change the economic future for the UK in the long-term. They never even think of looking at the fundamental thinking that once made Britain great or even considering going back to the roots of our previous economic dynamism some 150 years ago. They simply believe that if they keep on trying the same old spent economic strategies in new guises, that lady luck will eventually favour us through the laws of probability. Nothing could be further away from the truth and where even the new Con-Lib government are now continuing this self-defeatist regime of maintaining the status quo. For nothing is really changing in minds and attitudes of government to provide what Britain will need to survive in the economically hostile environment of this century. There is no concentration on the development of new technological industries. No new wealth providers are seen on the horizon. No, nothing that will provide our future generations with the wealth creating industries that they will need to simply survive. For China and the SE Asian economies are powering ahead and will over the next quarter of a century create whole new technological industries themselves that we and others in the West will have no alternative but to buy. The reason, 60% of the planet’s rare elements reside within Chinese soil and where eventually we shall all need access to these to prevent our economic oblivion. For China realised more than 25 years ago that the wars of the 21st century would not be military but economic and where they also knew that economic wars were/are far more devastating than conventional world wars. For they are in perpetuity and where dominant markets rule supreme. Considering therefore what is on the horizon for Britain, when will our new government realise that our only salvation is to develop new technological industries before they do. But time is running out on us to do this but where the most frightening fact is that government and their so-called wise advisers are not even aware of this ultimate threat to our lives and our global security as a nation.

    Dr David Hill
    Executive Director
    World Innovation Foundation Charity

  • Comment number 35.

    31. At 6:26pm on 15 Jun 2010, NonLondonView wrote:
    20. KevinB

    "Inflation is on the way down, so the doom mongers are wrong (as usual)
    "

    CPI Inflation 3.4% RPI Inflation 5.1%

    Great figures huh?..... the "doom mongers" can clearly see then numbers actually in front of their eyes, and understand the implications. Others seemingly cannot...

    It is about the trend, and the factors leading to the inflation, and how much of that would be influenced by raising interest rates

    May I suggest that you read the inflation report, and study the graph

    You may learn something

  • Comment number 36.

    A rise in VAT would be a fairer tax because everyone would have to pay it. The PAYE workers are by far the most heavily taxed so raising income tax would hit them the hardest.
    As for punitive reductions in civil servants pay, that would hardly save any money at all. With two thirds of civil servants earning less than £25K (with half earning £20K or less and one in five earning less than £15K) there is a good possibility that most receive family tax credit. If you reduce their wages then the tax credit will rise to fill the gap so over all you have no savings.
    The civil service make up 10% of the public sector and their pension arrangements are by far the poorest in the public sector. You could perhaps make savings by reducing the pension schemes of the 90% of non civil servant public sector workers down to the same level as the civil servants. If they do not relish this thought they could seek solice in the fact that they earn enough to fund their own private pension on top.
    One last point, the E grades are the lowest paid civil servants in the MoD and they have had their pay scale reduced by 15%. None of the better paid grades have had this reduction imposed upon them. I'm sure Dr Liam Fox has not had his pay scale lowered by 15% even though he could afford it more than those at the bottom on poverty wages.

  • Comment number 37.

    Regarding posts 2, 11, 16, & 18 on the subject of printing money,of course this is possible; nowadays it's called quantitative easing (QE). It was used to prevent the economy collapsing completely in the darkest days of the crisis. The downside is that it creates inflation and we are seeing that now, although a big chunk of the inflation is being caused by the devaluation of the pound rather than too much money sloshing around inside the country.

    A temporary revision of the inflation target to 3.5%pa instead of 2.0%pa would allow a little more QE, would erode the debt a bit faster and buy us time for the economy to get going again before returning to business as usual. A pre-announced plan to return to the 2.0%pa target, say in 0.5%pa steps over three years, would limit the effect on international bond markets. We've had £250bn of QE so far; surely another £75bn or so for the the next three years is better than cutting deeply into the public services we all rely upon to maintain a civilised way of life.

  • Comment number 38.

    I'm a civil servant and gor blimey I didn't know I was so popular, everyone wants a piece of me particularly my meagre salary, some want 20% others only 10%, well gee thanks guys and gals. I dare not mention that I was a banker before a civil servant so boy do I know how to be popular.

    Imagine six million people taking a 20% pay cut, deficit gone in one foul swoop, no retail sales, no demand for goods/services, LESS VAT paid, LESS income tax paid, in fact LESS tax paid, so possibly more cuts required and hey we still have a £Trillion debt. That works doesn't it.

    They way I see it we're all pretty much shot anyway, Europe is collapsing into a debt spiral, the US is printing unsustainable money by the shedload and the UK is about to kill off the money supply to the private sector via the public sector and strangle us all to death because the government has no idea of the implications of this folly. The only reason austerity has become the fashion is because it is the only way the current system can continue, and lets be honest the power brokers don't give a damn about the consequences to poor old joe public. As Ebenezer said "Then let them die and decrease the surplus populaton"

    Austerity is the final fling for capitalism as we know it, unless by some miracle it works of course, which it won't.

  • Comment number 39.

    What fails to be recognised is that the 'deficit' is completely irrelevant.

    This is not where people should be focusing, unless they are interested in irresponsible manipulation of the social political spectrum, at the expense of general happiness and future prosperity. I hope this is understood.

  • Comment number 40.

    36

    John

    I personally, would only like to see VAT increases in selected items from now, which could be deemed as luxury goods

    Other, more general VAT increases should be deferred to 1-2-2011, to give consideration to the difficulty it would cause retailers if increased on 1-1, and to allow the re-increase to 17.5% to work through the inflation snake

    I still think a 1p text tax, and 1p mobile phone call tax would raise a lot of money, and like all taxes that work well, would pluck the goose, not kill it

  • Comment number 41.

    34 Betty


    'Debt is such a powerful tool, it is such a useful tool, it's much better than colonialism ever was because you can keep control without having an army, without having a whole administration.'

    Susan George

    ......

    With regard to the idea of novel technology. The UK is too small an economy to easily develope the technology you wish to see other than by accident.

    The first objective has to be to engage more in work. This probably means the definiton of work has to change. Work as we know it is actually a recent device. Since the Industrial Revolution.

    Unless the West, and the UK in particular, can reinvent itself little will change, the question is how many do you meet who wish to embrace change, very few it would seem. The situation is one of black irony, akin to ownership rights squabbles over a garden which is in the process of sliding into the sea.

    Here is the latest report on food production from this site http://news.bbc.co.uk/1/hi/business/10320149.stm 'While overall world net production of commodities is forecast to grow 22%, production among the 30 members of the OECD is estimated at 10%. Production in western Europe alone will stagnate.' And you are worried about high tech. The ways and means to increase food production are to hand so it is a matter of price, and as usual it would appear it is judged the population do not appear to pay. Novel high tech is a whole different ball game and one which the UK has a poor record of exploiting.

    You are quite correct to point out the rare earth, rare element problem, but that is not the issue. As a further constraint countries like the USA are taking steps to encourage immigration by high tech idea people who do not meet the usual immigration criteria. It is a matter of critical mass in tech communities and infrastructure.

  • Comment number 42.

    #39. At 7:50pm on 15 Jun 2010, Oblivion wrote:

    "What fails to be recognised is that the 'deficit' is completely irrelevant.

    This is not where people should be focusing, unless they are interested in irresponsible manipulation of the social political spectrum, at the expense of general happiness and future prosperity. I hope this is understood."


    You have a keen sense of reality old chap. Too few realise the machinations going on inside system and the brokers of power therein. Ufortunately the few that do understand what is going on haven't got the power to alter it because the deluded mass public are only reading between the lines not behind them. Soon they will all be on board the good ship "None of the above" and things will change.

  • Comment number 43.

    40
    Kevinb
    Which items should be VAT exempt will be a contentious issue and there will always be losers. VAT at 20% would seem to be where the Govt. are heading but dare we wait until 2011 before biting the bullet?
    The text tax and mobile phone call tax sound like a good idea when you consider that the vast majority of texts and calls are unnecessary. There is a 'green' bonus too because there will be less microwaves sloshing about in the atmosphere and less power consumed as people cut back on phone use.
    How did everyone cope years ago before all this rapid communication technology took off?

  • Comment number 44.

    "37. At 7:47pm on 15 Jun 2010, SanTiger wrote:
    Regarding posts 2, 11, 16, & 18 on the subject of printing money,of course this is possible; nowadays it's called quantitative easing (QE). It was used to prevent the economy collapsing completely in the darkest days of the crisis. The downside is that it creates inflation and we are seeing that now, although a big chunk of the inflation is being caused by the devaluation of the pound rather than too much money sloshing around inside the country."


    SanTiger,
    I agree with your general conclusion, but I disagree that QE is printing money, as I have been told that the way it was done was to swap bonds for reserves of equal value, and therefore no new currency created as they net to zero. QE was there to create liquidity not money, as I understand it. 'Printing money' I understand is not inherenly inflationary while the real economy is able to absorb it (by reducing unemployment, increasing productivity, increasing resources etc) except by imported inflation, as you stated above.

    If we were threatened with inflation then changing the targets seems right to me, but we are not currently suffering from high inflation, the threat is still deflation (or disinflation) except in house prices. The high numbers you see in the CPI are mostly due to tax changes which the government could reverse if necessary. Underlying these tax changes the inflation is still very low. Spending cuts will make deflation the main problem again as I understand it.

  • Comment number 45.

    Do not expect anything sensible or meaningful from our politicians whatever their colour. All the evidence is that they have no conception of the difficulties facing the Western economies and have - therefore - no solutions. That they still yearn for and are trying to facilitate a return to the recent past shows how little they comprehend the forces at work that need to be planned for in setting future paths and solutions. Key is the removal of systemic risk from the financial markets yet this is not something that seems to be anywhere near the front of their agenda. When the next shock comes to the system (in perhaps less than twelve months now) we will have little option but to go with what the Chinese dictate as a way forward in the financial markets as we will be bankrupt by the consequences. Time to avoid this is rapidly running out as the banks seem to think it is back to business as usual. Mass social unrest should be something to avoid at all costs yet where we are is like watching a train wreck in slow motion.For me the cast of characters in control in the West seem more and more like little men of no substance and even worse of no quality. Not what we need when the world is evolving rapidly as power rapidly shifts to the East.

  • Comment number 46.

    38 NorthSeaHalibut:

    'I'm a civil servant and gor blimey I didn't know I was so popular, everyone wants a piece of me particularly my meagre salary'

    > Funny, I thought you posted that your salary was a figure which was on the median.

    'Austerity is the final fling for capitalism as we know it, unless by some miracle it works of course, which it won't.'

    > Austerity as currently being enacted is simply seeking the debt to be reduced to manageable levels to within in the total taxation band of 43 to 46 percent of GDP, as historically established as being sustainable. As a ex banker I am sure you understand that debt has to be kept at a level which is not damaging, after all it is not as though banks are not known to take action against people who are indiscriminate about their debt.

    There are problems with capitalism in the UK but to suggest the managment of public sector cost is anything much to do with them is simply not credible. The situation is quite straightforward. Brown just grew the public sector outside what was realistic to fund.

    Figures I have seen suggest natural wastage cuts the bill generally by 3 percent per annum. There also would appear to be sounds that wherever possible forced redundancy will not be used. This will impact the taking on of new, ie potential, employees more than existing employees if this is case.

    If you want to play on the violin, at least get the thing tuned up..

    I will say no more than I have today heard of a previously very successful private sector company which has cut its skilled and qualified workforce to 20 percent of what of was a year ago, an 80 percent drop and that appears more than you are talking about.

  • Comment number 47.

    43

    They actually spoke to each other, and could wait a few minutes before getting an answer...much more civilised

  • Comment number 48.

    Re 36

    Money is a bit tight. A good starting point however would be to acknowledge the fact that not all degree courses are of equal value. Greater incentives need to be given to students to study sciences and engineering, possibly through lower (or zero) tuition fees. That would probably have to mean higher fees for the rest unfortunately.

  • Comment number 49.

    #46. At 8:42pm on 15 Jun 2010, YellowBrickRoad wrote:
    "38 NorthSeaHalibut:

    'I'm a civil servant and gor blimey I didn't know I was so popular, everyone wants a piece of me particularly my meagre salary'

    > Funny, I thought you posted that your salary was a figure which was on the median."


    It is "on the median", how silly of me to not appreciate my untold wealth and affluence. I'll dash out and buy that 50" plasma now - thanks for enlightening me.

    "As a ex banker I am sure you understand that debt has to be kept at a level which is not damaging, after all it is not as though banks are not known to take action against people who are indiscriminate about their debt."

    You really can't be serious here can you. When I was a "Banker" it was positively advocated that anyone and everyone who could sign their name was encouraged to get indebted up to their eyeballs and beyond. You really shouldn't use the words banker,understand,debt,level, and not damaging in the same sentence.

    If you want to play on the violin, at least get the thing tuned up..

    I will say no more than I have today heard of a previously very successful private sector company which has cut its skilled and qualified workforce to 20 percent of what of was a year ago, an 80 percent drop and that appears more than you are talking about."


    So should I play my recently tuned violin for them then? If the current problems are solely due to Brown's unsustainable spending how come this previously succsseful PRIVATE sector company is failing. The austerity measures haven't kicked in yet so could there be the faintest chance the loss of credit and falling sales due to, well, loss of credit, perpetuated by our glorious casino bankers gambling losses has caused the company failure. I do sympathise with their plight but the public sector cuts may well finish them off.

    My department has already postponed millions of pounds worth of pre-procurement tenders and no doubt will be terminating millions of pounds of contracts when they expire in the next year or so, all within the private sector. Our budget is £100Million and all this is grinding to a halt, and my department is only a minor speck within the halls of whitehall so don't tell me the knock on effect won't hammer the private sector.

    As for no forced redundancies, I know otherwise, don't believe the sound bites or is it your job to propogate them?




  • Comment number 50.

    #46 YBR

    "debt has to be kept at a level which is not damaging, "

    You may be right but on a global basis this is precisely what has not happened. We now all face a situation wherein the debt cannot be repayed over the short, medium or long term.

    It matters not if the UK enagaes in an orgy of cuts and tax increases. It will not satisfy the markets. It does not matter how much Germany volunteers to support Eurozone states. It will never be enough.

    We have to find a way of dealing with the national, corporate and personal debt levels that does not criple all of our futures. Perhaps w should all have the ability to put our debts into a toxic account - just like the bankers!

  • Comment number 51.

    I could not agree more with post #34...it is profound.

    We are in an economic war with the Far East.

    Only a few other posters on here have also identified this fact......Statist being one of them.

  • Comment number 52.

    So pardon a new boy here but if we have a deficit then the government owe money to someone; after all that's what debt is. What I want to understand clearly is who exactly is lending the government , how and from where? It would be ironic indeed if it were banks wouldn't it?

  • Comment number 53.

    #50. foredeckdave wrote:

    "Perhaps we should all have the ability to put our debts into a toxic account - just like the bankers".

    Debt is repaid one way or another. It may not be as valuable (due to inflation) when it is repaid as it was when lent, but it is repaid. (I include writing it off and repossession of secured assets as repayment.)

    If we declare a jubilee and write off all debts - capitalism collapses. Even Islamic banking requires that debt is repaid. If lenders ever suspect that wholesale default will be permitted and debts forgiven they will cease lending and demand immediate repayment. This will collapse capitalism. This will destroy any hope of any from of a recovery in the near or medium term.

    So I cannot agree with the idea of toxic accounts if they are combined with permissive default. Non-performing debts are already placed in bad-debt accounts and collection attempts are enforced and in that sense toxic debt accounts already exist. These debts are even trades at less than their face value, but the borrower is still liable for the repayment of the whole - if the do not want to, or cannot, repay the legal option is to declare bankruptcy and then all of the assets of the bankrupt are gathered together and sold for the benefit of the lenders - the revenue comes first, then the secured debtors and then the unsecured and if there is anything left over the bankrupt gets it back. That is the law and this process is fundamental to capitalism, but I don't think that this is what you are referring to is it?

  • Comment number 54.

    #51 DebtJuggler,

    It must be that you haven't been around these pages for very long because the relationship (war if you like) with china in particular, the BRICS in general and the eastern nations has ben discussed here many times by many of us.

  • Comment number 55.

    I am not Stephanie (obviously) but i think i can help a little with your two questions FairlyNondescript.

    1) Firstly economic growth is when there is an expansion in output compared what was produced previously, while inflation is the rate at which prices are increasing, more precise way of thinking of inflation is to see it as the rate at which money loses its value. The link between growth and inflation are interlinked because growth often causes inflationary pressures which in encourages a rise in inflation. Rising inflation can dampen economic growth as if it isnt dealt with confidence and investment and demand drops as real spending power is lost and the main way of dealing with inflation is through either fiscal or monetary restraint (in the last thirty years it has been done mainly though monetary restraints i.e interest rates). Therefore there is a balance between growth and inflation as stimulating the economy too much through monetary or fiscal policy will cause an increase in demand pushing up prices causing a stopping of economic growth in the long run, but attempting to keep inflation too low and you will do the opposite and choke off economic growth as well. That in a very basic way is how inflation and growth are linked.

    The growth forecast cannot be cancelled out by inflation because a growth forcast are meant to be real terms increases. Real terms increases in growth is when the GDP of a state has increased after inflation.

    2) The reason why governments dont print money as their main tool is because by expanding the money supply all the government really does is increae the rate of inflation. While borrowing money also is inflationary but in a different way and is far less so as borrowing money actually allows for an increase in demand which does encourage inflationary pressure but is not likely to increase inflation in the same way as printing money. Also due to interest and payment requirement it means that in the long run it does not expand the money supply so it is far more stable and easy to control via borrowing than through printing money. v

    I hope this helps a bit, sorry if i did not explain it very well.

    cheers,
    Laurence.

  • Comment number 56.

    26: "A rise in VAT would be a fairer tax because everyone would have to pay it"

    No not really... a family on low income probably spends almost 100% of their income, mostly on VATable goods. A wealthy family may only spend, say, 25% of their income on purchases, the rest being saved/invested/paying motgages that does not attract VAT. Thus VAT is a disproportionally higher for a low income family.

  • Comment number 57.

    31. At 6:26pm on 15 Jun 2010, NonLondonView wrote:
    20. KevinB

    "Inflation is on the way down, so the doom mongers are wrong (as usual)
    "

    CPI Inflation 3.4% RPI Inflation 5.1%

    Great figures huh?..... the "doom mongers" can clearly see then numbers actually in front of their eyes, and understand the implications. Others seemingly cannot...

    -------------------------------------------
    They should go down a bit more next month, but after that will depend on the Budget and whether the supermarkets decide to put fuel up for the summer holiday months.

  • Comment number 58.

    So, starting from a council estate, I work hard through the state school system, get a degree, join the civil service in IT/project management, continue to work hard (and deliver on the sort of projects that industry fails to do but never talks about or faces the scrutiny/derision of the press), turn down opportunities in private sector for significantly more salary (2-3x and more), take no benefits from the state whatsoever, don't prop up the drugs market, and pay a hearty amount of tax (which can't avoid through some fancy scheme). I'm well motivated and take pride in my the work which puts something positive into society not simply turning a profit for a faceless corporation.
    My overall "package" is less than many of the thousands of consultants/contractors employed by the public sector who generally tend to be lower skilled or less experienced.
    I'm now deemed an unaffordable and expendable parasite on society. Given the £9b a year in benefit fraud and the £150b social security bill with a lot being paid out to lazy, bone-idle, enterprising (when it comes to maximising the payout for minimal effort) scumbags that bend and break "the system" at every turn, forgive me for feeling a bit peeved.
    Thanks a bunch folks

  • Comment number 59.

    Why should we believe the OBR more than the Labour government's analysis? If the OBR is to be believed then the Treasury in the past has been telling lies and should be sacked and replaced by the OBR team.

  • Comment number 60.

    #52. In answer to your question, you may find the following site useful.
    http://www.debtbombshell.com/sources.htm
    This provides data from offical sources and explains the nature of the national debt and our deficit.
    Hope this helps.

    P.S. Be warned, it makes depressing reading, but at least it helps understand what a mess this country has become in terms of its economic management.

  • Comment number 61.

    #53 JFH,

    John,

    You are hanging on to what will soon beome an old fashioned notion i.e. that debt has to be repayed.

    Just look back to what happened to Germany after WW1. Reperations (debt repayment under another name) fueled both inflation and created an ideal environment for the rise of Nazism and ultimately WW2. Now just replace reperations with globalisation. Here again we have the similar circumstances. The difference this time is that we are looking at the Western Hemisphere rather than one country. No matter how hard we try we cannot produce our way out of the debt.

    We are left with a number of options:

    (1) Some form of, at least, sovereign debt forgiveness

    or

    (2) The adoption of protectionist policies

    or

    (3) A complete re-thinking of Capitalist free market principles

    or

    (4) War

    The pain of cuts, both in the UK and across Europe will not resolve the problem. This is no short term measure and will ultimately lead to major social unrest. They will not create any form of true economic stimulous from which we can recover economic equilibrum. They merely detract us from dealing with the need to completely re-think our economic reality.

    I have said before that we need to base our new economics upon re-establishing the link between wealth and value and thereby put money back into its true position as the mere oil of economic activity rather than the master. We need to re-think our ideas about what constitutes work and what its value should be.

    Somebody earlier lamented the fact we have 'little' people for leaders and I tend to agree. Where is the new Keynes or even the new Churchill? We need to find them soon or we may find that option (4) is the only optio left open to us and I fear that far more tan debt.

  • Comment number 62.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 63.

    26. At 5:30pm on 15 Jun 2010, bafanabafanaboundary wrote:
    "....fundamental re-think of what government does and how it does it, including the benefit system and the newly topical issue of public sector pensions and pay (which I'll discuss properly sometime soon). "

    When you discuss this topic 'properly' perhaps you will be able to explain to me the following; once someone in the public sector retires at normal retirement age (and there is a significant proportion that retire earlier than that) which is currently, typically 60, then the very first year that they are retired they get back more from their pension than they have ever paid in and every single year of retirement after that is profit (trust me you can work it out mathematically!).
    /////////////////////////////////////
    The misconception here is that public service pensions are all the same, they are not, although they all have significant employer contributions. Some have significant employee contribution rates. Some are termed "non-contributory" but are based on the assumption that the salary is lower to fund the pension (in effect an assumed deduction). Now I do agree that in recent years the former type have too low a contribution and the latter have become relatively favourable because of falling private sector pay. This needs correction, but your mathematics are flawed because they are receiving the fruits of the employer contributions and their own actual or assumed contributions. Also for large parts of their working life, public service salaries have been significantly less favourable than private sector salaries where comparisions are possible. During this recession, like others, things have moved the other way.

    What annoys me about the debate over public sector pensions is not the need for change but the fact that many commentators and others seem to turn their anger on the public servants. If their employer offers a job on defined terms, decides not have a pension fund, decides that one way of competing for employees is to offer a good pension, its hardly the employee's fault.

    More worrying is the asumption that the failure of the private sector to provide employees with good pensions, or indeed any pensions, is acceptable in this era.

    When I started work 35 years ago, I took it for granted that my employer in public or private sector would provide me with a reasonable pension as part of my benefits package and have built up a pension in both sectors. I accepted that the employer contributions would be better in the public sector and that the salary would be lower. I appreciate that pension funds have suffered through investment returns but the fact that so many people have not invested enough or at all is quite appalling. Many people who have not invested in pensions are the same people who have created the credit crunch and overspent on housing, new cars, and expensive holidays. Similarly, I find it incredible that so many self employed people, who for years enjoyed the tax advantages of working for themseves, have still failed to provide a good pension for themselves and now bleat about public service pensions.

    I repeat that I agree public pensions they need changing, but the failure of people to provide pensions when they did not get them from their employer is part of the problem.

  • Comment number 64.

    #58 Dave

    I was with you all the way until you got to the £9bn benefit fraud, research just how much benefit entitlement is not actually claimed.

    That some at the bottom are gaming the system is not in question, if you were brought up on a sink estate today and managed to get to university, you would still leave with 20grand of debt and end up as a shelf stacker/trolly pusher at your local SafeCo.
    If you are lucky and form a stable relationship with a co-worker, on a combined income of 32grand you will never be able to afford a house and settle down and have children (one of you will have to give up work or spend all of the income on childcare).
    For those at the bottom the only way to get on and get ahead is to get pregnant and get housed by the local authority, that is the system that they have been given.

    Your anger should be aimed at those higher up the food chain, those who have the power to actualy change things, but that's right, they are already gaming the system by CGT at only 18% when they are probably earning enough to have to pay 40% income tax, these are the people who say things like 'I pay less tax as a proportion than my cleaner' and yet do nothing about it.

    So yes, you have a right to be angry about being victimised as a public sector worker, those below you are not the ones doing the victimisation.
    You believe what you read in the media, those with the power to change things own the media, they will not change until you think for yourself.

  • Comment number 65.

  • Comment number 66.

    Are there any indications from the markets as to what level of cuts to the budget deficit and over what time period they are looking for or will find acceptable?

  • Comment number 67.

    Q Why is there a deficit?
    A Because government revenue fell just as spending was rising , after 15yrs of continued growth..
    Q Why did that happen?
    A Because the Liquidity needed by banks to renew mortgage bundle loans dried up.....
    ..... because the ratings agency rated stinkers as good'uns.
    ......This caused the ratings agencies then to rate good'uns as stinkers.
    ......This caused a mortgage famine which precipitated a property slump
    ..... which precipitated a further liquidity drought,
    ......which meant that the financial services companies made no cash , builders stopped building, and everyone stopped paying stamp duties, CGT , bank profits , income tax , and VAT Receipts.
    ......First-timers could not get low deposit loans and existing homeowners did not want to sell for a loss.
    Q Should property prices fall?
    A No because that would further stymie the construction industry.
    Q So what is needed?
    A More liquidity.
    Q Surely not more QE?
    A Surely more QE.
    Q But won't the banks just hoard it like they have been doing?
    A Maybe not if QE hoardings got taxed if unused.
    Q But surely if the banks hold more cash and have money set aside for a crash they are more stable.
    A What will make banks more stable is a dynamic economy and a thriving, busy mortgage market and a climate which encourages the commercial lending necessary ro fuel our recovery.
    AND THAT IN TURN WILL BOOST THE GOVERNMENT COFFERS BY MORE THAN THE OBR CAN DREAM OF.
    DEALS OIL WHEELS.
    And if we are movin' we are shakin!
    Money held by banks in bank vaults does the economy no good.
    We have to make money work for us, not just work for money.
    Brides and grooms are screaming for new flats, pensioners are desperate to downsize, parents want to help their kids buy flats, and we still watch Kirsty'n'wotzisname and think wouldn't it be nice to move to the countryside.
    We need to get moving again.
    And that isn't going to happen by slashing everything in a huff.
    C'mon everybody ,C'mon Torydems, get your eyes on the ball and get us going again.
    We're nearly there!

  • Comment number 68.

    PREDICTION: MASSIVE TELLY AND FURNITURE SALES FOR WORLD CUP.
    People booking holidays again and buying clothes and trampolines and kitchens.Developers actually getting go-aheads.
    THINK Q2 WILL ACTUALLY TURN OUT TO BE QUITE GOOD THOUGH VOLCANO AND STRIKES AND FEAR OF OSBORNE GETTING IN THE WAY.

    Onward June!

  • Comment number 69.

    50 foredeckdave:


    '.............."debt has to be kept at a level which is not damaging, "

    You may be right but on a global basis this is precisely what has not happened. We now all face a situation wherein the debt cannot be repayed over the short, medium or long term.............'

    Okay post figures that say the debt cannot be repaid.

  • Comment number 70.

    63 Max

    I think that you are missing the point. People aren't angry at public servants for accepting a generous pension arrangement from their employers (except MPs maybe). It is more directed at previous governments for the fact that huge unfunded public sector liabilities have been allowed to build up over a long period of time. GB's 5bn annual tax grab on pension funds hasn't sweetened many peoples' disposition towards the last government in particular.

    "More worrying is the asumption that the failure of the private sector to provide employees with good pensions, or indeed any pensions, is acceptable in this era."

    Most now offer money purchase schemes as final salary schemes are too expensive. This memo obviously didn't get to the government.

    "I repeat that I agree public pensions they need changing, but the failure of people to provide pensions when they did not get them from their employer is part of the problem."

    How does this impact on the affordability of public sector pensions? Some public sector workers also neglect to make pension contributions. Wouldn't this makes the unfunded public sector pensions liability smaller than it would otherwise have been?

  • Comment number 71.

    re #58
    'Fraid a lot of the posting gets very simplistic and yah-boo and teenagery at times. Hang in there with us, share the wisdom, it's appreciated by some.

    Hey! Hey! Let's be c a r e f u l out there today.

  • Comment number 72.

    56. At 11:07pm on 15 Jun 2010, NonLondonView wrote:
    26: "A rise in VAT would be a fairer tax because everyone would have to pay it"

    No not really... a family on low income probably spends almost 100% of their income, mostly on VATable goods. A wealthy family may only spend, say, 25% of their income on purchases, the rest being saved/invested/paying motgages that does not attract VAT. Thus VAT is a disproportionally higher for a low income family.
    -----------------------------------------------
    You are right in overall terms in what you say but the example quoted is a tad wide of the mark. A low income family will not have much discretionary disposable income to spend on VATable items but, obviously, when they do, it forms a bigger proportion of their income when compared to others.

    It is the essential spend element of their disposable income that they are forced to spend on, that carries VAT that is the problem. [Another example of wealth transfer from poor to wealthy if Andy C555 is reading this!] VAT on utilities. VAT on adult clothing. VAT on insurance. VAT on car transport, assuming they are able to afford/have to afford to run a car.

    But again that is not the whole problem. Because VAT is a top slicer it is inflationary so when those items go up in cost, the VAT goes up. People with economic power are usually able to increase their incomes to cope. But if a low income person has no economic power, then they suffer.

  • Comment number 73.

    67. "Q Why is there a deficit?
    A Because government revenue fell just as spending was rising , after 15yrs of continued growth.."

    No, your are just plain wrong. There has been a deficit EVERY YEAR since 2002. The correct answer to your own question is:

    A: Because Labour government spending outstripped growth every year since 2002

  • Comment number 74.

    55. At 11:02pm on 15 Jun 2010, asmaticant wrote:

    The growth forecast cannot be cancelled out by inflation because a growth forcast are meant to be real terms increases. Real terms increases in growth is when the GDP of a state has increased after inflation.
    ---------------------------------------------
    Your attempt to help is appreciated but I think there might be a 'bit of a whoopsie' in the above para.

    Real terms increase is when the GDP of a State has increased before inflation - ie. with inflation deducted from the GDP.

    I am guessing that it was an inadvertant slip of the post - we've all done it. Unfortunately, one or two Chancellors of the Exchequer have relied on 'Joe Public' not asking awkward questions about the inflation element of growth, 'cos it would have made 'their' figures look less attractive and, that apart, one of them had abolished inflation anyway.

  • Comment number 75.

    49. At 9:41pm on 15 Jun 2010, NorthSeaHalibut wrote:

    If your not happy with your salary that is your individual problem surely, particularly if it is on the median. If you are on the median then the word megre is hardly approriate is it. Plenty will apply for your job if you want to quit. If you quit and it is not available then it is not judged essential is it. You should not employ somebody unless they solve a critical problem. Somehow the public sector seems to have lost sight of this criteria and been driven by PCness.

    You then post stuff along the lines - Bankers oversold debt. Funny they are quick enough to play tough ball on debt if it suits them. Perhaps you are mistaking sales activity for management. Perhaps the bank you worked for made the same mistake.

    The private sector business noted is related to the housing sector and health and safety driven. The guy running it listened to Darlings big idea that strong growth was due this year. He procrastinated and when he had to act it was much worse than if he had acted earlier. Perhaps there is a message there. His sector is in trouble due Brown allowing the housing market to overheat. When housing gets going again there will not be the skills available. The point is you go on about cuts in the public sector but they are not at the level seen in some areas in the private sector. As the public sector is funded via sustainable wealth creation in the private sector what do you expect to follow.

    Millions of pounds of public sector contracts being cancelled. Yes again what do you expect. The point is they shouldnt have been initiated in the first place. Thats called overspending. That is the whole basis. spending money that is not there.

    Forced redundancies - I said that policy is to focus on voluntary redundancies first - and that furthermore natural wastage is estimated to take care of 3 percent per annum. Those are facts, the 3 percent figure is apparently accepted by all sides, employers and employee bodies and independent auditors. After several years it compounds up to above 10 percent. No such nicety occurs in a private sector business facing a severe collapse in revenue. There is no buffering from reality.

    You continually mix together the fact public sector overspending has to be cut with bank sector problems and pretend that you are a victim of them when you are not. The bubble actually resulted in more workers being employed in the public sector. The irony is that it is the bank casino side which has been helping prop up the banks and giving substatial tax revnue to the treasury recently, but lets not mention that. The economy is now dropping back to where it would have been without the bubble. If there are problems it is because the public overspending has to be paid for.

    The problems in the UK economy are related to many things but most roads lead back to inept government strategy and the over dominance of housing and the British somehow believing if they own a house they can run their own bank and borrow from themselves without consequence.

    It is my job to run my business, nothing to do with politics but I fail to see why your very skewed interpretation should go without comment.

    The simple fact is the public sector has to run based on a tax take from the economy. That tax take is established in developed western nations in Europe - principally due to social welfare costs - as being in the region 46 percent longterm. It can wobble about but it would appear to have to run at that level. Brown ran it up to the mid fifties based on the current economy size. Without strong growth above inflation it has to drop back pro rata to match the size of the resultant economy. All else follows. You cannot solve a debt problem by borrowing more.

    There are a lot of people yelling cuts should not be made, blah blah blah. Uusally people who feel they will lose out somewhere. Fine, tell me where the growth above inflation is coming from. If you can't, bearing in mind the only growth for over a decade was the financial sector, now heavily pruned, then live with the cuts.

  • Comment number 76.

    73 NonLondonView:

    'There has been a deficit EVERY YEAR since 2002.'

    Yup, Brown was a real fire starter, he sure knew how to burn money.

  • Comment number 77.

    YBR,

    To re-quote you from an earlier post, "I'm not here to educate you", there is plenty of figures and commentry all suggesting that the global debt has grown to large to repay.

  • Comment number 78.

    76. At 09:30am on 16 Jun 2010, YellowBrickRoad wrote:
    73 NonLondonView:

    'There has been a deficit EVERY YEAR since 2002.'

    Yup, Brown was a real fire starter, he sure knew how to burn money.

    He was no Prodigy, that's for sure

  • Comment number 79.

    # 13 wrote "That implies a cut of 120 bn in expenditure - clearly a bit high so let us try again!"

    Why - that level of cut is roughly 20% of public spending and I am afraid is about the level we need. Obviously a bit of GDP growth will allow the figures to come down slightly over 5 years to maybe only £100 bn but that is still what we need.

    The reason is simple, and one I have mentioned before:

    from govt and OECD statistics over the long term (ie over last 50 years) public spending in UK varies between just under 35% of GDP (in good times) to around 43-44% in a rescession. Tax as a percentage of GDP varies from around 34-35% to 37%. This implies in a rescession UK temporarily runs a deficit of 6-7%.

    Now look at the figures that Lab bequeathed us. In 2007 (before the crash so technically in good times) public spending was 44% of GDP and rose in 2009-10 to 53% of GDP. Tax has risen in the same period from 37% of GDP to just over 40%.

    Putting it very crudely, Lab spent in good times as much as most govt spend in bad times and we are already over taxed by historical standards.

    The govt needs to have a strategy to bring public spending back down to below 40% of GDP. The problem for them is that the massive debt also bequeathed to us by Lab will result in much higher interest bills so leaving even less for public spending.

    That is the size of whole we are in

  • Comment number 80.

    #61. foredeckdave wrote:

    #53 JFH, etc.

    Dave,

    I think that your view that the level of debt will collapse capitalism as we have known it for the last 350 or more years is unlikely to come to pass. I am more optimistic about the flexibility of the system that have served us fairly well for hundreds of generations.

    Whilst it is true that there has been a bubble economy fro the last decade or more that too has happened in the past and capitalism has recovered in time. Even if your most pessimistic option 4 (war/civil war)) actually comes to pass - after it is over capitalism will resume and debts will have to repaid and security will have to be enforced no matter who wins.

    It is still my best guess that we will suffer a Long Depression (like the 1870s-1890s) for exactly the same reason - excess secured private debt secured on property - and other parts of the globe will push ahead and we in the UK will lag badly behind. Except for an island of huge prosperity in the city of London who will continue to live off of the lifeblood of the Nation - sucking us dry! (This is my optimistic scenario!)

  • Comment number 81.

    Stephanie,

    Your blog seems to accept conventional political views but support only those of the immediate and deep variety.

    As an antidote to political outpourings of all shades, this link takes you to as concise a case as I've seen for not cutting too quickly and too deeply - and it's based on recent events for those who can't be bothered to consider more historical times.

    http://www.taxresearch.org.uk/Blog/2010/06/15/the-folly-of-following-ireland-whose-cuts-have-not-worked/

    What's the case for ignoring the evidence presented in this article?

  • Comment number 82.

    At post 68

    As an average working Joe, I don't see things returning to normal in my houshold. I'm self employed after being made redundant early 2009, struggling with cash flow; Mrs Roadie earns a small salary and we have a 20 year old back from Uni on his summer break, with no money; and an 18 year old who has only just found employment after several months. We can't afford new 'nice to have' kit, and any increase in taxation and the cost of living is going to further reduce our buying power.

    Austerity will hit us all in some format, over the medium/longer term. There may well be a 'feel good' short term blip, but the longer term prognosis is not good, in terms of consumer spending habits.

    Kevin, post 20.

    It is too early to say that the Doom Mongers are incorrect with regard to inflation rising. You are basing this comment on one months inflation figures and taking a very blinkered short term view.

  • Comment number 83.

    82

    I am actually basing my comment on the trend, and my view on the factors involved in the make-up of the number, oil prices, commodity prices, the fact I believe that Sterling will strengthen against the dollar, and that food prices will fall

    I am prepared to give my opinion, and in sticking my neck out, take the chance that it might get chopped off

    Blinkered?

    No

  • Comment number 84.

    Hi Stephanie, great feature, as always. I think you pointed out the obvious, at least to me if not the political crowd, 'ringfencing is unaffordable, all departments have to take a cut or some are going to become disfunctional. Here in Wales, the Chief Constable of North Wales has predicted a fall in police numbers (patrol officers that is) in order to meet his reduced budget. This is the reality. I look forward to your analysis of public sector pensions, particularly the 'unfunded' part, which is news to public servants since they've been contributing towards it all their working lives. Regards, etc.

  • Comment number 85.

    77 fdd

    There is always commentary and opinion, not all opinion is correct. Money is belief, Adam Smith.

    Your central arguements are default and protectionism and both are weak.

    Private debt dies with the individual and settlement of their estate so has limited timescale. So the issue is public debt and the balance between fresh debt, servicing existing debt, and what can be raised sustainably from taxation.

    Strange that on a major issue for you that you can offer nothing other than the statement 'global debt is not repayable' as though it has been heard on a mountain. UK debt has also suddenly migrated to global debt it would seem.

  • Comment number 86.

    82 roadie

    The first bit seems a fair summary with the comment that consumer habnits are changing as well, when the value of money drops spending genrally moves towards less discrimination, when value returns then spending judged against different values. So the analysts cant understand how US consumer confidence has risen but retail hasnt followed. The answer is spending is against a different set of values.

    Can't comment about inflation other than prices on me are going up so my prices are going up.

    But a subdued outlook appears likely.

  • Comment number 87.

    I think the one thing you can bank on is that the poorest are about to be hit hardest: VAT is a non-progressive tax. As a consumption tax it takes a disproportionately larger chunk of low wages than of high wages. As the other side of the coin is cuts to public services, again disproportionately affecting the poor and disadvantaged, we are in the situation where the wealthy are being subsidised by the poor. As the problems in the economy have been caused by the banks, by most definitions wealthy, and by the public bail out of the same then this is really sticking it to the poor just what they are here for: to enable the rich to never have to make sacrifices for the good of the country.
    As the banks engineered not only their own fragility by poor / fraudulent speculation so they also fuelled the credit boom in this country through persuading gullible, stupid or desparate people to over-extend on credit they could not afford. Ah the beauties of capitalism - the rich get richer and the poor get shafted.

  • Comment number 88.

    # 85 YBR,

    Now Adam Smith may be many things but omnipotent he is not! If for you money is belief then I pity the paupacy of your position. Money is nothing. Wealth, in all of its true form, and value are the true factors of economic activity. The problem is that too many have been conned into beliveing that money is the be all and end all. It is a token nothing more and nothing less and the soner we put it back into its true position the sooner we can work towards sorting this mess out.

    As for my offering nothing "other than the statement 'global debt is not repayable' as though it has been heard on a mountain." then I would refer you to the mass of academic and commercial reports available which all come to the same conclusion. If you wish to remain in your apparent ignorance of its existance then that is your decision. Your further comment regarding UK debt shows your limited understanding of the true economic situation. The UK is geographically an island. However, economically it is suffering the same problems as every nation in the Western hemisphere.

    You state that " Private debt dies with the individual and settlement of their estate so has limited timescale." There again you are wrong. In the UK, the major debt item for most people is their mortagage. That does not go away with death or even the settlement of their estate. The effects will be experienced by their survivors long into the future. For non-secured loans then you have to explore further the effects on spouses' credit rating when their partners die leaving unpaid debts -let alone the 'moral' responsibility.

    Now I challenge you to provide proof that protectionism is a weak argument. Please don't fall back on the 'it promotes war' argument (and less so on the "it prolonged the Great Depression" lie) as they are both specious arguments. To argue that free market globalisation is the route to success is now shown to be the fraud that it is.

  • Comment number 89.

    #80 JFH,

    Despite the opinion of some others, my argument has not been based upon seeing the death of capitalism. It is however fimly based for the need of a root and branch revision. It cannot cope in its present form.

    The concentration of 'apparent' wealth in fewer and fewer hands, the disparity in wealth between the top and even the median and the downgrading of the concept of value in favour of cost are all indicators of the need for revision

  • Comment number 90.

    @80 JfH (aka Jimmy Floyd Hasselbaink??:)

    I agree with you on this - in that the debt can be repaid.

    The idea of defaulting or crying that it is just too much says it all about what we have become over the past 13 years. Borrow, spend - blame someone else then walk away.

    If you don't want the bust don't have the boom. Think if from 2002 we had had balanced budgets how much stronger a position we will be in - rather than the crazy borrowing and waste. If Brown had carried on paying off debt rather than start racking it up we could have been almost debt free even allowing for recession.

    Has the massive increase in spending made the nation healthier, better educated, safer, harder working, more self-reliant. Or, has it made us lazy, dependant, and expectanat that however we live our lives the satae will be there to bail us out?

    You can't borrow your way out of debt - and the state can't do everything.

  • Comment number 91.

    CUTS? No, rather a return to realistic government spending in line with what the nation can afford.

  • Comment number 92.

    #75. At 09:24am on 16 Jun 2010, YellowBrickRoad wrote:

    Too much to rehash again

    Did I say I wasn't happy with my salary, nope, I said it was meagre. Compared to what I was earning it is meagre but then I'm content with my lot, I have no aspirations of great wealth but I do have principles and they could no longer be bought by my bankers salary. Sure I have debt thanks to exposure to cheap money when a bank employee but I'm living with it although somewhat begrudgingly at being a debt slave and charged absurd rates.

    "Victim." No not that either. While I'm certainly under threat of redundancy it won't kill me, it may bankrupt me but I'll survive and fight another day, arrangements have been made for this event. Besides I'll get one of those huge pay off's you're all moaning about :)

    My concerns originate from my political belief, you see I'm not one of the "I'm all right Jack" Blue Brigade I'm a socialist and I'm concerned about my fellow man. I don't think I can watch people starve to death in the streets because that's what killing the economy and withdrawing benefits for the unemployed and sick will do. Ovbiously you're in the "Hawk" camp, it's no coincidence Hawks are merciless consumers of the vulnerable is it! You may belive the problem is due to an oversized public sector I will agree this is partly true due to poor growth forecasts over many years, but don't seriously tell me the banking collapse was irrelevant in all this current chaos.

    As for total debt (UK or global) being impossible to pay off as FDD has stated. To clear the debt all economies other than those in the developing East would have to run at a surplus for many many years. To do this the value of the available resources i.e mineral and labour would have to exceed the liability of the individual states over the period of debt clearance which they would not. Add austerity to this and the debt will either increase or stagnate due to loss of tax revenue as a lack of capital funding and public investement causes the economy to nosedive. So unless China is going to bail out the rest of the world (they have all the resources, minerals and labour) the debt, both UK and global, is unpayable.

    If your personal debt became a problem you have two choices earn more or spend less. You may simply opt to spend less which is all well and good if your income remains static or increases, however if your income goes down you're in real trouble and herein is the governments folly.

  • Comment number 93.

    9. At 3:19pm on 15 Jun 2010, damnearperfect wrote:
    As long as those earning above the 40% tax rate don't have to pay National Insurance on that part of their earnings - after all that would be so unfair
    - - - - -- - - -

    Well Labour saw to this. Not only do those in the 40% tax bracket have to keep paying NI, albeit only at 1%, on earnings in this tax band so do those in the 50% tax bracket as well
    http://www.hmrc.gov.uk/rates/nic.htm
    http://www.hmrc.gov.uk/rates/it.htm

  • Comment number 94.

    # 53 John_from_Hendon wrote:

    "If we declare a jubilee and write off all debts - capitalism collapses."

    Oh, I don't know - think of all that free-ed up money suddenly available for spending on stuff. Sounds like capitalism continues.

  • Comment number 95.

    # 38 NorthSeaHalibut wrote:

    "the UK is about to kill off the money supply to the private sector via the public sector"

    I am sorry to hear that you in the public sector are about to experience what it has been like for us in the private sector for some time now - but the UK economy can't afford to run you all. If you want to accuse anyone of "folly", then look at your former colleagues (the bankers) who took the bail-out and then kept hold of it to improve the look of their balance sheets, and look at some of your present colleagues who have been busy paying out more in State benefits that are received in tax revenues: that is a totally unsustainable pattern.

    Under NuLabour, parts of the public sector "poached" areas of activity that used to supply part of the private sector's bread-and-butter. And then did it less well.

    I am sure that I will feel the effects of the upcoming emergency budget but I believe that the public sector is the right place to start. In the private sector, we have already voluntarily made those economies (in order merely to survive) that the public sector is only now going to have forced on it.

  • Comment number 96.

    The inflation figures are down. A different of doom-mongers may be right.

  • Comment number 97.

    88 ffd

    You just get more and more convoluted, further and further away. The twists and turns you come up with are something else.

    As for globalisation. This culturally has probably peaked. BTW people do not have to buy imports. Perhaps you should ask them why they do and what they intend doing in the future.

    Debt is simple really, you have to agree to it. The strange thing is a lot of people want to agree to it on the basis somebodyelse pays for it. Its not a debt then, its a gift. Even stranger when you object to the taking of debt that is really a gift - that is objected to in turn.

    I am not going to get into an argument with you about protectionism because you mind is made up. Though quite how you square fortress protectionism with your statement re the UK - economically it is suffering the same problems as the Westen nations I dont know. LMAO.

    You faith in academics and their reports is quite taking. Pray, how many got it right with the current conundrum.

  • Comment number 98.

    #95 DigAndDelve,

    "Under NuLabour, parts of the public sector "poached" areas of activity that used to supply part of the private sector's bread-and-butter. And then did it less well."

    Can you be specific on the areas "poached" and have they not been more than off-set by the privitisation of public services particularly in the local government areas?

    BTW, if you look at private sector wage rates as reported by CIPD, IOD, and CBI then there has been more media hype than substance regarding wage cuts.


  • Comment number 99.

    I guess in your theory Kevin, you are reckoning on reduced consumer demand bringing down the price of oil and commodities? I'm not saying you're right or wrong here.

    If the austerity measures appear to succeed in the UK, then Sterling may indeed gain some strength against the Euro and Dollar, on the basis that parts of Europe is so fragile and the US astronomical levels of debt.

    With the imminent cuts about to blunt any growth, surely we are going to see stagflation. YBR has illustrated in his post 86 that his prices will go up to compensate for the higher prices he pays - this is where it starts.

    Just suppose more QE has to be implemented to counteract the effects of austerity, this will just end up as Monopoly money in the markets again; and when the markets rise, so does the price of oil.

  • Comment number 100.

    92 NSH

    'I don't think I can watch people starve to death in the streets because that's what killing the economy and withdrawing benefits for the unemployed and sick will do.'

    Do you right B movie plots, what a load of twaddle. A 10 percent drop in the economy following a economic bubble is people dead in the street.

    I am not a 'hawk', I am a realist who has to operate in the economic environment and does so successfully. I know the environment. There is no exploitation of anybody here. The Gordon Brown model however clearly was based on exploiting people otherwise there wouldnt be a mess would there.

    I am not in the least bit bothered about your payout if you get one. If you are so comfortable and oh so cushtie why have you been posting all the 'up the workers', you can't have it both ways.

 

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