Monday, 4 February 2013

Living Beyond Our Means

Apparently we have been doing it for years. Successive governments have spent money we didn’t have, while ignoring the debt we accumulated. As a nation we really should be paying more attention to what our elected government is doing.

The UK debt bombshell explains it all without me trying to duplicate what is already a no nonsense presentation. I urge you all to go read it.

But what I would like to emphasise here is the difference that is often unexplained between deficit and debt. It is simply this:
The UK debt is the amount of money we owe.
The deficit is any money above the amount of money we owe.

In short this means that if the government have got it right and taxes are as high as spending, there will be no deficit at the end of the year BUT the debt remains unpaid, untouched, unloved and unnoticed.

It means that the government has a 1.5 trillion pound overdraft that it isn’t paying off. Worse than that is the money it has spent beyond the overdraft. Both Labour AND Conservative have done this.

To spend more than what you have means you have to ‘invent’ more money. The government does this by creating ‘Bonds’ or ‘Gilts’ that it absolutely must pay back to the bearer at a later date.

So if we put this into household economics, it is like having a maxed out overdraft and credit cards ...and then taking out a massive loan. The overdraft is never addressed, the credit cards are paid on interest only and there is a time limit on when we have to start paying the loan. For households that limit is usually only about a month but the government can create bonds that are paid back in 5 or 10 years.

Consequently the national debt is always someone else’s problem and in my opinion is a symptom of very short term politics. In the meantime, successive governments have allowed accountancy firms to invent ways of letting large corporations wriggle out of billions of pounds worth or tax revenues. What a shame they haven't spent as much time plugging those holes as they have tinkering endlessly with income tax and hiking remorselessly the duty on fuel, tobacco and alcohol.

Clearly we cannot trust any political body to deal with our finances. So in the same way that Mr George Osborne, current chancellor of the exchequer, has announced that the banks are to be split between the high street banks and the investment banks, so it should be perhaps that there is a regulatory body that sets a budget for the government, regardless of their political leaning, with a plan to pay off the national debt.

Otherwise our long term financial stability is always just one crisis away from austerity and hard times.

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