Tuesday, 17 November 2009

Debt Is Good?

Hey, if bankers can make billions out of trading debt then every penny we clock up as a nation must be a good thing? Right?

Really, we owe £825bn as a nation and we must be getting richer if we borrow more, according to the rules of bankers - so borrowing a record £175bn more over the next two years must actually be a good thing. No need to tighten our belts, rein in the spending, cut costs, make efficiencies - perish the thought. Spend as if there is no tomorrow, because debt is seriously good.

Well there is a minor flaw to the logic. We know as individuals and consumers that we can borrow and borrow thanks to the plentiful supply of low cost credit using the above logic. Then the party can come to a shuddering halt. As if someone has noticed a small turd in the bath water or that the emperor is actually wearing no clothes, someone always realises that your ability to service the debt gets in the way of a good time. The debt suddenly becomes a millstone around your neck and for consumers that can mean a lot of hardship, possibly bankruptcy in the extreme. Banks can be merciless if you cannot pay up, as we know, yet when they get into debt, we get to pay for it. An odd story but that's 'Big World Economics' for you.

While our Government continues to spend as if there is no tomorrow, we ordinary folk in the street know that it cannot go on - just as many of us realised that the rise in house values had to collapse at some time. Too much debt is a nightmare. We know that, yet we are not the equivalent of financial 'rocket scientists'.

It seems the public know more about the current national situation than the ministers at the helm - in line with people at the IMF and other bodies that look at Britain as growing pile of sewage on the world seas when it comes to borrowing money. We borrow and borrow yet we make no long or short term plans in which to pay the money back other than believing we will win phenomenal growth at the next throw of the dice or that the economic recovery will take care of all that we need to repay the money. It's like an executive asking the bank for a loan as the business is losing money but makes no modifications to his or her business because they believe success is just around the corner when it hasn't been for six straight quarters.

Put in those terms, Britain is heading for a financial disaster. By all means follow the creed of Friedman but there comes a time when you have make cost cuts as the situation will start to spiral.

A survey of the public agrees - so it is not the population of this country that wants to keep clocking up this debt. We have to pay for it in taxes - the interest bill by 2014 will be £60bn, the size of the NHS budget in a single year - and contemplating it scares the heck out of us. A BBC poll suggests 59% of people would prefer to cut spending rather than have increased taxes. Almost half of those surveyed (48%) also believed there should be a pay freeze in the public sector - the reason it was only half, I suspect, is that the proportion of jobs in the public sector must mean that statistically half the people who were surveyed that work must be in the public sector - it's a position which itself is a time bomb. Bureaucracy and civil service should be the first big area to get the knife, there are just oceans of people doing little of value to this nation other than occupying a seat and consuming tax pounds.

31% of those surveyed reckon the pay freeze should for two years - welcome to the world of sane thinking. The good times, as the public know, are over.

Here's a thought, over half the people reckon that the highest earners in the public sector should take between a 5% and 10% pay cut. During the entire recession and credit crunch, the Sunday Times Appointments Section has been chock full of public sector senior jobs with huge salaries - far greater than the private sector for similar jobs and with gilt edged pension plans and benefits. It seems as if the public sector has been booming while business has experienced reality.

Of course, you have to get the priorities right - the Armed Forces and parts of the NHS should not endure some cuts but there is so much wastage in this country all the way to the top that thinking you have only to cut all salaries is the mindless way of viewing things. It's like us cutting spending on training reservists and then sending them to fight the Taliban - doing such things are stupidity in the extreme but increasing the pay for MPs is exactly the same. You have to look at things from a value point of view. Increasing the pay of a CEO at an NHS Trust gets you no value while increasing the wage of a nurse or hospital doctor does. It makes you shudder when Labour introduced the manic scheme for GPs that increased their pay overnight by a huge amount for nothing extra only to find they had made a gross mistake in calculating how much they actually worked to qualify for their money.

This whole Government tenure has been one of laissez faire management of finances, policing and immigration as examples and now, as we contemplate the abyss of massive and unmanageable public debt, they continue to spend on stupid things like MoD and FSA staff bonuses when the country is on its knees while cutting spend on Armed Forces and frontline weapons while trying to fight two wars.
The penny has not dropped in all quarters yet as Glasgow North East showed - but at least this survey shows we are finally getting there.

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