Cuts

This is a pair of pie charts showing the UK Government’s income and expenditure from a couple of months ago. This will doubtless be revised after the emergency budget on 22 June. You can see the size of the problem here. The difference between cash in and cash out is made up by borrowing. At the time these graphs were were produced, the gap was £704bn – £541bn = £163bn.

These numbers are generally expressed as a proportion of GDP. The limit under the Maastricht criteria was 3%. The UK is not in the Eurozone, but reports these numbers anyway. The situation improved somewhat recently to around £156bn p.a., but that is still bad at 11.6% of GDP.

UK borrowing below forecast, still worst since WWII

The questions are these.

Justification

Why is it OK for some people to spend other people’s money? If we continued on the previous path without cutting public spending, we would borrow maybe an additional £1,000bn over the course of a parliament. It would take probably 40 or 50 years to pay that back at best. We are spending it now, but will not hang around to pay it back. Why should people graduating with me this year have to pick up that tab?

Do we need cuts?

There are still people who want to borrow more and spend more. “Now is not the time to be making severe cuts to the economy. Cuts too deep and too soon risk the economy falling back into recession,” said Brendan Barber, TUC general secretary, which has warned that the plans could increase unemployment and the benefits bill. Well, that’s true – but what is the alternative?

Where to cut?

If you want to solve a cashflow problem, you have to reduce spending and increase income (or taxes). The government has decided this split will be 80/20. If you want to do something serious about this problem, you have to look at the largest item, which is by far social security spending at £231bn p.a. on the above pie charts.

To put that in perspective, the LHC, which is the most expensive scientific experiment ever built, cost £5.6bn.

http://en.wikipedia.org/wiki/Large_Hadron_Collider#Cost. What would the UK economy be like if we built 41 LHC’s in Leeds every year?

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7 Responses to Cuts

  1. James Monk says:

    The government isn’t “some people.” Your money is only worth anything because the government will put anyone in gaol who does not pay their taxes. You earn income in the UK on the understanding that in order to perpetuate this system the government, having this implicit threat of force, get’s a large say in how some of the economic resources you generate (or acquire) get used.

    Historically, if you wanted to change that, you would have to come up with an army and fight the government. These days you form a political party and convince the majority of people of your case. So the government continues to be able to spend your money for as long as they have a popular mandate to do so, which is basically for as long as the UK as we know it continues to exist. You have no reason to complain, since you have done very well out of that set up.

    At any point in time we could eliminate the deficit entirely by raising more tax. So you could flip the argument around and say that the government is borrowing money in order to keep more of it in the hands of the well off.

    Both the pro-cuts and pro-borrowing people are wrong. You acknowledge that when you admit the TUC may be right that the cuts are likely to cause another recession (the consequences of which will be…)

  2. timlshort says:

    What is the government composed of? Aliens?

    “To be GOVERNED is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right nor the wisdom nor the virtue to do so. To be GOVERNED is to be at every operation, at every transaction noted, registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished. It is, under pretext of public utility, and in the name of the general interest, to be placed under contribution, drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored. That is government; that is its justice; that is its morality.”

    — P. J. Proudhon, General Idea of Revolution in the Nineteenth Century

  3. timlshort says:

    By ‘earn income in the UK’ you mean in my case ‘exist in the UK and pay the government taxes on the income I generate in the world for that privilege’. My money is worth something because people say it is and accept it. If all governments had that ability, then the currency in Zimbabwe would not be the USD right now.

    Why should I not complain about a system under which I have, as you say, done very well? Surely I should be permitted the altruistic outlook to wish that future generations should have the same chances as I did, rather than being crushed under the dead hand of state debt incurred for no good reason.

    “At any point in time we could eliminate the deficit entirely by raising more tax.” This is equivalent to people who pay their mortgages on a credit card saying that although they have £20,000 outstanding, they can get on top of it. One pence on income tax generates £2.5bn:

    http://www.telegraph.co.uk/news/uknews/1508789/Penny-on-income-tax-needed-to-fill-Treasury-black-hole.html

    The deficit is £156bn so you need to raise income tax by 62p which is quite a lot on top of the current 50% rate. And that would not touch the backlog of debt, which at £893bn would need income tax to go to 357%.

  4. timlshort says:

    “the government is borrowing money in order to keep more of it in the hands of the well off”

    The top 10% of earners pay half of all income tax. Despite the claims in the election that the low paid had a higher marginal rate of tax than the rich, that failed to take account, ludicrously, of the fact that most of the income of the low paid comes in the form of benefits. So their effective tax rate was -43%, which was considerably less than 51%.

    “Both the pro-cuts and pro-borrowing people are wrong”

    So what else is there?

  5. Dave says:

    Why is it OK for some people to spend other people’s money?

    It’s not like future generation don’t benefit from (some of) the borrowing of the past. The easiest example is WWII. Borrowing to fund it through lend lease seriously affected at least three generations afterwards, but they benefited from it. In the same way, much of the borrowing since ’97 that went into the NHS and schools is a benefit to future generations. (this discussion is, obviously, much more complicated. Especially with regard to the amount spent on wage increases rather than infrastructure more narrowly, but I think an incentive argument is compelling on that one).

    “The top 10% of earners pay half of all income tax. Despite the claims in the election that the low paid had a higher marginal rate of tax than the rich, that failed to take account, ludicrously, of the fact that most of the income of the low paid comes in the form of benefits. So their effective tax rate was -43%, which was considerably less than 51%.”

    Your marginal tax rate argument is a double edged sword. So we include various government spending, benefits, on the marginal tax rate of the lower income group. We should also do the same thing for the higher income group. Government spending on universities, most of the civil service, expensive public transport, the arts, buying banks etc. etc. are benefits that accrue to the higher income group without touching the lower, and this is ignoring some very deep rooted structural issues in our society that prevent social mobility. How do the figures look after all this? It’s almost certainly too complicated to give more than a ball park figure, but that’s the point. Marginal tax rates tell only a small part of the story.

  6. timlshort says:

    1). OK so you need to tell me what proportion of the £231bn social security spend represents long-term investment CapEx resulting in substantially non-depreciated hard assets to be enjoyed by those people paying tax in the workforce over the next 40 years, and further what proportion that needs to be in order to justify spending their money.

    WWII I think is a good type of situation when maybe you can dig deep. I don’t see what we are doing right now which is comparable.

    You will notice I have not attacked NHS spending or education spending. But even there, I don’t believe you will have a lot of hard assets. Some PFI schools and hospitals – and that’s great – that’s exactly what government borrowing is for. There used to be a rule that the government could borrow only to invest. If you want to bring that back and apply it to the NHS, even with some very broad measure of ‘investment’ which allows that ‘people living longer and more productively’ then you won’t find me standing in your way.

    But I don’t think that is the bulk of NHS and education spending and I don’t think it is any of the social security spending.

    2). Absolutely. If you are saying that we should move in the direction whereby person B receives an effective monetary transfer from person A iff person A wishes to buy some product or service and voluntarily pays therefor, then bring it on.

    If you want do to stuff like means test child benefit, fine.

    Government spending on universities

    Everyone benefits from this because graduates pay more tax

    Most of the civil service

    To be eliminated and replaced by private sector providers in competitive circumstances.

    Expensive public transport

    Think we need to redefine ‘expensive’ to take account of negative externalities notably climate change/ But yes, let’s have road charging for private vehicles, maybe use the income to subsidise buses and leave it at that.

    The arts

    Tiny, but OK, can it if you want total consistency.

    Buying banks

    Buying retail banks not I-banks. Arguably this benefits everyone as well, but I would have been very happy to see RBS go bust.

  7. Pingback: IFS « Timlshort's Blog

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