The last Government massively overspent, so they were borrowing at the top of the economic cycle in 2007, when you ideally run a surplus to reduce your debts, so your economic cupboard is not empty when you have a recession. Gordon McRuin decided like King Canute that the obvious thing to do was move the goal posts for the economic cycle so decided there would be no immediate downturn! In 2008 the biggest depression in our lifetimes happened and as the tide went out, we could all see that ugly view that the Labour party and Gordon McRuin were all naked. Now with 6.25% drop in GDP, much lower tax receipts, too big to fail banks and higher social costs due to higher unemployment, the deficit rocketed to about 8% of GDP or £160bn plus the bailout money to RBS and LLoyds that year. The cost of servicing our sovereign debts in 2008 was about £16bn per year.
The coalition's version of austerity and reducing the deficit was to increase taxes so the Government received more money and to let government spending increase less quickly than under Labour. In a recession there is a fine line between cutting spending and going too far so you end up in a recession, which reduces government revenue, so you need to make more cuts. The dog chasing its tail syndrome, this is what has happened in countries like Greece, Portugal, Italy and Spain. Although there are areas I would criticise the government, like increasing rather than reducing Overseas Aid, they actually did not steer too bad a path, where we had several years of near to zero growth (as hard as you want to apply austerity) and a gradual reduction of the deficit. Between now and 2018-19 when they expect to balance the books government spending will continue to grow every year. So why more cuts?
The elephant in the room in servicing this massive rise in Sovereign debt which this year will be about £64bn, this is a £48bn increase on what we were paying in 2008. This is x1.5 the defense budget, all of the education budget or about 30% of the NHS budget, this means cut in all areas except those ring fenced like the NHS budget just to stand still.
We had a public and private debt driven spending spurge from 2000 to 2010 and slight reductions since then in private debt and a small slowdown in the increase in public debt. Borrowing money is future spending brought forward, so all the time we or the government are borrowing money, so we are reducing our future growth prospects, where that money in now spent and has to be paid back along with the extra interest. We can therefore expect for many years, below trend growth of 2.5 to 3% and it may be shortly far worse where an average economic cycle is about 78 months, which makes the next global slowdown (hopefully) or recession due in 2015.
The world's major economies are still no where near out of the woods, with the US creating $1.05tn per year of QE. They have now started to taper (reduce) this. The global economy, might be out of the operating theatre but it is still in intensive care. The good news is that the prospects for the UK's economy currently look better than most.
I just hope we don't end up with the UK version of Hollende with Millipede and Balls-up in 2015 or it will be the start of another economic disaster cycle.
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Topic: Government debt.... (Read 2450 times)