UK National Debt

When Tony Blair swept to power in 1997 the UK economy was in a strong position, after a painful and turbulent decade under Margaret Thatcher and John Major the public finances had been brought into balance. All looked well until Gordon Brown was unleashed on the economy as our chancellor. To fulfil all of New Labours election promises, they quickly began borrowing to fund their quest for popularity. Although we were in a period of growth and prosperity, profligate Brown decided to spend the Country into ever increasing debt. When Brown was finally ousted as de facto PM we were borrowing around £170 billion a year. Our national debt currently stands at around £1.5 trillion and is increasing at around £3,000 a second.

The state has been wasting our money for decades. Weak politicians have bribed voters with endless amounts of borrowed cash. As a result, in 2013 the interest on the national debt cost £51 billion a year. That’s more than we spend on defence, and not much less than the entire education budget. To put that into perspective as how this relates to us:

• We owe £22,865 for every man, woman and child
• That’s more than £51,089 for every person in employment
• Every household will pay £1,874 this year, just to cover the interest

The national debt reached around £2.3 trillion by January 2011, anyone who still believes Gordon Brown was a good chancellor is very seriously deluded, yes we have had a worldwide recession, but it is quite possible that our leaders, along with other World leaders have manufactured the recession; they certainly haven’t shown prudent management of our economies. It was on Brown’s watch that sensible and effective regulation was relaxed or removed.

Incredibly greedy people, with nothing to lose personally, should never be allowed to self-regulate, why would they?

Also, the debt level prior to the recession was high anyway, in a time when we should have been saving, then again Brown confidently predicted an end to boom and bust, and how very prophetic that was. He also presided over the wrecking of both public and private pensions; he sold off lots of our gold reserves at its lowest value, losing us billions. It was also Brown who handed control of fiscal policy to the Bank of England, a private company with private interests. He may go down in history as the worst chancellor ever, and quite possibly the worst PM ever as well. Alistair Darling will get some of the blame, but in his defence he became chancellor at possibly the worst time possible, Brown had already wrecked the economy and now a huge recession was hitting.

The official government measure of what is commonly referred to as the national debt is Public Sector Net Debt (PSND). In this context, public sector refers to central government, local government and publicly-owned corporations.

Measuring PSND is the joint responsibility of the Office of National Statistics and HM Treasury. In their words, PSND “records most financial liabilities issued by the public sector less its holdings of liquid financial assets, such as bank deposits.” The debt is financed by the sale of government bonds or more recently, printing money via the Bank of England’s Quantitative Easing programme.

The impact of fiscal policy

Politicians talk about fiscal policy as if it were a business strategy for the country. But government is nothing like a business. The state doesn’t earn anything. Instead, it confiscates its money from people in the form of tax. It’s subject to none of the constraints and competition a normal business has to contend with. All fiscal policy means is how the Government taxes us and how it spends the money.

However, like any person or business, governments borrow and spend for two principal reasons: either to produce or to consume. The most obvious form of government consumption is when the state transfers money to people in the form of pensions and benefits. Spending on health and education can also consume money, especially when it fails to deliver improvements. The bottom line is that borrowing to fund this kind of expenditure won’t pay for itself. When the cash is spent, it’s gone and can only be repaid with higher taxes.

Public investment

Alternatively, when government spends money productively it invests in things like roads, railways, energy generation and communication networks. Investment in capital infrastructure like this is commonly associated with higher economic growth and output. It can help to facilitate trade and promote economic activity in the private sector, where a nation’s wealth is created. In other words, borrowing to produce can pay for itself. The bad news is that we’re doing the opposite.

A strange religion has come to dominate British life in the post-war era. It teaches that the values of our forebears are outmoded and their achievements of no great significance. It preaches that wealth is no longer created through man’s ingenuity and endeavour, but something bestowed upon the grateful congregation by a divine elite. This religion is government, its ministers are politicians and its gospel is debt.

Politicians have convinced us that everyone has a right to comfort and happiness and that government has a moral duty to provide it. They believe that wealth and liberation come in the form of paper or electronic money and that distributing limitless amounts of this commodity is a cure for all social and economic ills.

Distorted values

Only by spending this confiscated or borrowed money is a person truly moral. Anyone who dares to question this twisted faith is demonised. Any politician who questions the wisdom of government indebtedness and debt-fuelled consumption is branded inhumane for supporting “savage cuts to vital public services. “

Is it ethical to inflate our currency to reduce the debt burden, punishing generations of savers and their prudent lives of hard work?

Is it right that our greed threatens the economic freedom that’s enabled more people to improve their lives than at any other time in history?

Is it moral that our debt has to be repaid by our unborn children, while we enrich our lives at their expense?

Quantitative Easing Explained

In an effort to prevent the economy slipping into depression, the Bank of England  slashed interest rates to 0.5%. But with rates at rock bottom the Bank – which acts on behalf of the Government – has left itself with little room to manoeuvre. Subsequently, it embarked on a more controversial stimulus programme, known as Quantitative Easing.

This oblique term sounds technical, but it’s little more than a euphemism for good old-fashioned money printing. It all boils down to increasing the supply of money in the economy, as the Bank of England explains on its website:

“Instead of lowering Bank Rate to increase the amount of money in the economy, the Bank supplies extra money directly. This does not involve printing more banknotes. Instead the Bank pays for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from. This extra money supports more spending in the economy to bring future inflation back to the target.”

Printing money

Apparently because we now print money electronically, everything’s going to be fine. Really? The Bank insists QE is necessary to maintain inflation at the target rate of 2%. Although this may or may not be true, it’s important to understand QE’s other role: namely funding public spending by creating money from thin air.

Quantitative Easing involves the Bank of England creating money to buy back UK gilts. In doing so it’s funding a glut of borrowing that the Government knows it would struggle to raise on the bond market. If you were a foreign investor in British bonds, what would you think about being paid with devalued money? This is one of the main reasons sterling has declined by 30% against the Dollar in recent years. We’re not the world’s reserve currency so we can’t get away with tricks like this.

Between March and July 2009 the Bank of England literally created £113.8 billion of new money to buy gilts. In the same period the DMO sold £80 billion of debt in its auctions. So we’re currently printing money at a faster rate than we’re legitimately selling bonds to investors. The question is, does a government hooked on spending know when to stop?

Debauching our currency to relieve the debt burden is only going to create an even bigger crisis of confidence. If investors pull the plug on our spending habit, the Pound will decline even further and everything we import will get more expensive. Interest rates will climb higher, as the bond market demands a higher return to risk money on Britain.

This all adds up to a truly toxic combination for our fragile economy.