You may have noticed quite opposing opinions about how Britain’s debt is to be dealt with. Both the politicians and economists and struggling, some arguing we should start to reduce the increase in the debt now and some arguing we should do it later when the recovery is well under way. So why is this and what should we do? AND what is likely to happen in the longer term?
There are two reasons why opinions differ – one being because economics is not a science but an art! The other is explained here. So what is the scale of the problem?
Being in Balance: The government’s expenditure (like yours and mine) needs to be in balance with its income – if they spend more than they earn they have to borrow. Spend less and they can save (or pay off debt). This year they are spending about £170B more than they earn (through taxation) which is £2,800 per person including children; about £7,500 for every household, or £6,500 for every single taxpayer. So for all of us to live as we do in the UK with all the services we have (education, health, police, defense, social services etc) each and every taxpayer would have to pay that £6,500 more in tax this year. Wow! The problem is that big.
But unfortunately next year is going to be almost exactly the same and it isn’t forecast that we will be back in balance for maybe a decade. So we all need to pay that £6,500 extra next year – and so on – just to stand still, which of course we cannot do. Or the government keeps borrowing to cover that additional deficit in which case by about 2014/15 we will be in debt for £1.4T or an astonishing £54,000 per taxpayer – or even more. Now if you or I owe too much our credit rating drops and anybody lending to us won’t do so without a higher interest rate – and it is exactly the same with UK Ltd. So our next government – whichever it is – has a wee problem which is why the big debate – ‘When should we start reducing the growth in our debt?’ We are not even remotely going to start paying off the debt, just slowing the speed with which it is growing.
Some are arguing to start now and some want to wait. Why the disagreement?
The dilemma: is that if the people who lend to UK Ltd think it is becoming more risky they will demand a higher interest rate. But the interest we are paying on our debt was already over £30B in 2009, so even at the same rate of interest it will be over £60B per year by 2014. But if the rate rose significantly we could be paying over £100B every year just to cover the interest – or £4,000 for every taxpayer in the UK. But there is another rub as this is only the national debt due by our government. Our personal debt is also over £1.4T which is almost exactly the same again – so we are dealing here with close to economic meltdown if not actual meltdown.
The difficulty is ‘Economic Growth’. If our economy grows, more people are employed. This means unemployment and social security costs go down and income from personal tax goes up. At the same time consumer spending increases which means government income from both VAT & Corporation tax rise. This in turn means the national annual deficit goes down. But a declining economy does the opposite so having growth is hugely important and the rate of that growth equally so.
In order to get through this mess we not only need economic growth but at a significant rate. For example, a ½% growth rate would mean the national debt keeps rising albeit very slightly slower, so in the end even that growth would be lost as the economy has to deal with the ever bigger debt. So the growth rate needs to be high enough to stall the growth in debt AND pay it down. It is a big ask if we follow the policy of growing ourselves out of debt, and maybe we need a sustained growth of 3% to 4% to achieve this, and this needs to continue for way more than a decade.
- Policy A: Those arguing we need to keep spending (as the Prime Minister and Chancellor do) are hoping this will make the economy grow fast enough to achieve this. However this is a high risk strategy as if that growth is not achieved and maintained we will have a much higher national debt and be in an unarguably massively worse mess. A sure way to meltdown.
- Policy B: Those not accepting Policy A argue we should start slowing the growth in debt now, which can only be achieved either by raising taxation or reducing government expenditure. But both these policies reduce the amount of money we all have available to spend on goods; which in turn reduces the value of our economy – which reduces the amount of income the government receives – and will either increase unemployment OR slow the decrease in unemployment. And this could mean we don’t actually end up reducing the deficit.
Putting it politely we are damned if we do and damned if we don’t. We are between a big rock and a very hard place which is why there are two opinions on what to do and neither is certainly right.
To get some of the issues with Policy A into perspective, nearly all politicians and economists have told us “The biggest expenditure cuts in recent history are going to be necessary”. But such cuts are very likely to stop the economy growing at the rates necessary for this policy to succeed. After all, if there are huge cuts in the various departments be they in health, education, defense, social services or any others, then people will lose their jobs and there will be less spending power in the economy. And as well as that, many forecasts for growth under Policy A are in the 1% to 2% range – a long way from the original 3½% forecast by the Chancellor.
Let’s look at the debt another way – though it is impossible to say exactly how big it is because of the bank bail outs. We don’t know if some of the money poured into the banks will become debt – and if so how much. But even without that the government’s forecast is that we are going to have a national debt equal to everything we create in the UK in a year (£1.4T) and a personal debt that is the same (another £1.4T). Or the UK has already spent at least everything we will earn in the next two years.
Our country is in an extremely serious situation as only very substantial sustained growth can get us through. Trying to find that route that reduces the rate of increase in the National debt while simultaneously not increasing unemployment and not driving us back into a further recession is frankly close to impossible – hence the disagreements on what to do now and why some want one route and some the other. Neither is likely to work for long and this comes in the middle of a General Election when we can have little trust in the political system.
But what of the longer term future?
If it is going to take many years to recover from this debacle, what is in prospect for these years?
In any event, even under the most optimistic conditions, the situation we are in will take decades or a generation to get back under control. And bear in mind all politicians and most economists were shocked by the arrival of the recent recession. They simply didn’t see it coming. No politicians predicted it, least of all our Prime Minister, and only a couple of economists put their heads over the parapet saying we were heading for trouble. So can they guarantee there won’t be another crash or crunch while we are trying to pay down this debt? No, no, no. They cannot.
We will not go over the triggers for the recent economic crash in this document, but back in 2002 I did in fact predict there would be such a crash and I dated it for 2007/8. I know others who were arguing for 2012. I gave it an 85% probability of happening through 2007/8 but 95% it was going to happen within a few years of that date. It could have been much worse and was so nearly catastrophic, so with equal confidence I predict there will be another crash in the coming years (less than 10) that will be much harder for us.
There is a technical reason why I cannot yet predict the date more accurately [which is to do with being able to predict the global growth in economic output with greater accuracy than yet possible]. So within the time it is going to take to economically resolve the mess we are in, the probability is huge that we will suffer another crash, but next time we will not have the reserves [not that we had them this time either] to find a way through. So there is a great urgency to reduce our debt that is not in the thinking of those arguing and deciding what we should do now.
Why can I be so certain there is going to be another crash?
I find it difficult to understand why those in power don’t understand the notion of a finite world. All resources on planet Earth are finite – nothing is infinite – and when finite supplies are used they get scarcer and eventually reach a point of exhaustion where the economic cost of obtaining more cannot be carried. Some of our leading economists are fighting to achieve monster rates of global economic growth so all the 9B people that they think will be on Earth by 2050 can live highly consumptive lives. But that is simply impossible.
So our current government is arguing, and no doubt the next will too, to generate massive rates of economic growth so we consume even more – and it is called winning general elections. But they do seem to believe it can be done. Astonishing really that economists could be so focused on their goal that they miss the obvious.
One difficulty is that the economic system the world uses was created by Adam Smith back in his ‘Wealth of Nations’ published in 1776 when the world bore no resemblance to our current one. Global population was then about 700M or 1/10th of what it is now, and 10 times the population consuming probably 10 or more times as much each are almost on two different planets. The rules that could apply then don’t necessarily apply now and actually cannot. Adam Smith argued that ever greater specialization increased output and therefore wealth, but nearly all available ‘wealth’ is now consumed – it was and is finite. By 1776 little resource had been consumed.
Population: I have been dedicating my life to planet earth since 1995 and during extensive research I found there were many different figures for the size of the population the world could sustain, so I to worked it out from first principles. A big job I promise and it took over 9 months but was hugely worth the effort as I now know what causes the limits. The answer for the UK – assuming we use all the land and leave nothing for nature (we have almost no wild original land left in the UK) is that the truly sustainable population is 21.8M – and we have about 63M people here now including those here illegally. It is based on year 2000 levels of consumption and takes no account of energy or climate change.
Now if we argue the Brazilians should not be felling the Amazon rainforest (which I do with a passion) then we should be replacing some of the wild land we have destroyed in the UK. Good for the goose is good for the gander! So leaving a reasonable amount of land for nature our sustainable figure is around 15M – or Great Britain is 4 times overpopulated now. We will consider the global sustainable population in a future document.
So our future cannot simply be an extrapolation of the past, and the world is not going to be able to feed the 9B the UN says will be here, let alone give them our standard of living/consumption. It is impossible and can be shown to be so.
The problem: It is surprising that when studying Economics we start by understanding the demand and supply curves and their interaction, but the most influential people seem to have lost sight of these basics.
Back in 2007 the supply of oil started not to keep up with demand – and prices shot up as oil has an inelastic demand (the amount we want hardly changes with price) so the price went to $147. And when the global economy had suffered the shock it brought and demand dropped a little the price crashed (a feature of inelastic demand).
Some of us have been working on ‘Peak Oil’ for more than a decade, but ‘Peak Food’ is not seemingly broadly understood or recognized. But make no mistake the capacity of the world to produce food is limited and finite just as oil is – so as demand for basic foods exceeds the supply the price will rocket as this has a very inelastic demand curve. Removing substantial amounts of land from food and into energy production (biomass and biofuels) was always and inevitably going to lead to food shortages earlier than otherwise would have been the case – hence the rapid doubling of the price of maize and other staples over the last couple of years and why the price now bounces all over the place leaving our terrific farming community wondering what to grow. As the food supply is dominated by the northern hemisphere it peaks when the northern harvest comes in and troughs before it. So the prices will bounce wildly even across a year as we go from a sufficiency to an insufficiency. The fact that the price declines for a period is not a sign there is plenty of food. The fact it is volatile proves we are facing global shortages.
With virtually all the world’s rain fed land already being used to produce our food (UN report) and an astonishing 40% of it being produced from irrigated land – and with our water resources being drained and virtually ever river of any use having been dammed – those expecting our food supply to double by 2050 (as the UN argues is necessary) are frankly wrong. It simply isn’t going to happen. It is a whole different additional work and will be covered in subsequent information releases on this site with full explanations.
So even before considering the effects (if any) of climate change (which will be quantified in yet another release), world food prices are going to rise substantially. This will take spending away from consumer goods as we must be alive to consume anything! And this means a drop in global GDP which means sustained significant rates of GDP growth are not going to happen. And of course energy costs are also going to rise inexorably which takes further spending away from consumer goods.
From my perspective the notion we will be able to continue growing economically for long enough to sort out the problem we now have is extraordinarily unlikely (and I am being polite).