Spending cuts: A long way to go

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Why is the debate in the media (and specifically the BBC) just about cuts. Isn't it a possibility that some more of the deficit reduction could be done through tax increases. Yes I know VAT is going up but there are other options too - it also seems strange that they went for VAT when this is the most likely to constrain growth in the economy.

I'd really like to see the BBC talk about possibility of tax increases as well as asking for opinions on cuts.

In Sweden when they had a big deficit which was cut they balanced the cuts (which effected the poor most) with tax increases for the richest - this was the way of ensuring it was seen as fair and that they really were 'all in this together'. They didn't aim for the 80% cuts, 20% tax increases - it just ended up that way!

The OBR's own documents show that cutting government capital spending has a detrimental effect on the economy which is greater than the negative effect of raising of taxes. [I will look for the detail and post it later!]

In particular taxing rich individuals who are just storing their rather than spending it would generate growth for the economy. Slashing jobseekers on the other hand won't save as much as nearly all of the jobseekers gets spent.

Why not increase the 1% Employees National insurance for higher earners to 5% and use this money (over £10 billion) to reduce the debt or alternatively use it to build more social housing - generating jobs and reducing the housing benefit bill at the same time.

See my above post (#2) this is what I was talking about regarding the OBR budget forecast June 2010 and how it shows that they regard tax rises as less damaging for the economy than some of the spending cuts in the short term. This surely means that as a country as well as considering cuts to reduce the deficit we must also be looking at tax rises.

For example the OBR make it clear that a cut in capital expenditure of £10bn for example will feed directly into a cut in GDP of the exact same amount in the short term. A cut in welfare or current spending of £10bn would result in a cut to GDP of £6bn.

However changes to taxes in income which raise £10bn in taxes will only reduce GDP by £3bn in the short run - interestingly they consider that VAT increases will have a slightly more negative effect on the economy (£3.5bn in this example) so it seems that the VAT rise rather than NIC rise was more politically than economically driven.

This is simplified version of the detail which is below however what is clear is that the independent OBR judge that in the short term tax rises (particularly on income) would have a less damaging effect on the economy than spending cuts (both current and capital spending - but particularly capital spending).

Extract from OBR Budget Forecast June 2010:

"C.54 The OBR has applied a range of fiscal multipliers to key Budget measures to help inform its judgement on the overall impact of the Budget forecasts. These multipliers are shown in Table C8. A figure of 0.6, for example, means that a measure which has a direct effect of raising revenue by 1 per cent of GDP is estimated to reduce GDP by 0.6 per cent in the short run.

Table C8: Estimates of fiscal multipliers
Impact multipliers
Change in VAT rate - 0.35
Changes in the personal tax allowance and National Insurance Contributions (NICs) - 0.3
AME welfare measures - 0.6
Implied Resource Departmental Expenditure Limits (RDEL) - 0.6
Implied Capital Departmental Expenditure Limits (CDEL) - 1.0 "

Well for a start there is the 20% increase in the civil service over the life of the last government that could be cut.

As for raising taxes - well expect skilled workers and senior managers to be beeting a path to the exit ports, many already have and more will do so, since there will be very few left to run things round here, industry will suffer even more than it already is from a skills shortage, there will will be no one left to spend so retail will decline.

So will the last one to leave please turn out the lights!

PS My theory for why the BBC are so keen to talk about cuts, cuts, cuts rather than the possibility of tax increases is that they themselves are worried about the future cuts that will and are affecting them.

If the new gov't felt the BBC were being too 'left wing' with talk of tax increases - maybe they would be likely to cut the license fee even more?! Better for the beeb to keep their new masters on side and encourage a debate on slashing costs through catching up with those benefit 'scroungers' [total cost of Job Seekers allowance less than £5 billion] rather than shining a light on tax avoidance and evasion [total cost estimated well over £50 billion].

Please remember beeb that those working on the minimum wage pay exactly the same licence fee as Philip Green - so please make sure you speak up for them all.

PPS. I would say a key reason the gov got into this mess in the first place was income taxes were too low not only that spending was too high. But promising to keep tax low for the richest is the only way to power in a country who's politicans are dominated by Rupert Murdochs view on the world - who will promise to destroy any politician that dare suggest a rate of tax higher than 40%. So much for all being in this together?!

I wholeheartedly agree with danj180 - we must talk about increasing taxes for all those earning over £50k per annum, as well as substantially upping the highest rate of tax for the super-rich (over £200k pa)

why does everybody say that increasing taxes for the rich is fair,
IT ISN'T.
Even paying a percentage is very unfair because the rich pay so much more.
fair would be charging everyone the same but that won't happen in a million years.
If you let rich people keep there money they employ more people!
And I'm note a rich person, neither do I earn a fortune.

PPPS (yes its silly I know!) - By the way the above comments re the BBC are not a criticism of these blogs they are about the 'Spending Cuts' season on the beeb which is being heavily promoted. Why not have a 'Tax Rises' season?!!! - of course I jest as this would never happen as it would be seen as political (and unpopular). Spending cuts are political too though!

The consensus that the deficit reduction can only be done through cuts needs to be challenged but the BBC with the its 'Spending Cuts' season is reinforcing the view that it must be all done through cuts. Ironically it is using public cash to promote this view?!

As well as the fast vs slower deficit reduction views being explored can we also have a spending cuts vs tax rises one?

Sorry for quite a few rants on this blog today - this is my last post today - I promise!!!

Is that £83Bn reduction in the deficit or £83Bn cuts in nominal public sector budgets where the latter may lead to reduction in the deficit but not on a pound for pound basis. Turfing 100K out of their public sector jobs will generate additional benefit claims, reduce taxes, require redundancy/severance payments and reduce general consumer spending with knock on consequences that will also conspire to increase public expenditure - reactive impedance. What is needed is for economists to apply their analytical skills to understanding the mechanisms and consequences of the state rushing to slash and burn.

What frightens me is not the cuts themselves but how those cuts are implemented. A senior civil servant sat in their office is going to start by cutting any external works, for example Highways Agency will cut back on say building a by pass, fine you may say but if you employ the same number of people in the central office to look after the bye pass that was not built then that cut is of no value. Simarly if you have maintanence works on machines and building and you simply do not let any of these contracts but maintain an overseeing staff as if you had, again, that cut is worthless.
The very real danger is that the managers implementing these cuts will as sure as night follows day cut any area rather than their own backyard and we could end up with big lopsided reductions in spending where nothing gets maintained, cleaned, built, nursed, designed, fixed but the government departments maintain their overall size and therfore cost making the whole process meaningless and severely damaging the private sector whilst public sector wages and size continues to grow.

"7. At 1:56pm on 13 Sep 2010, alan howarth wrote:
why does everybody say that increasing taxes for the rich is fair,
IT ISN'T.
Even paying a percentage is very unfair because the rich pay so much more."

I believe Alan's comment is worth considering, for a reason that has never been too clear not only do most believe that the absoulute amount of tax paid should increase monotonically but also the percentage. More irritatingly tax schedules always have thresholds with jumps, the world does now have calculators, formulae and spreadsheets; it is about time the amount of (income) tax paid as a function of earnings became a smooth curve (hence acting on fiscal drag and spreading any increases more smoothly) and a debate about whether it should be S-shaped or even non-monotonic had. Earn more and pay less tax - now there is an incentive.

[On the other hand let's alway monitor our Gini coefficient]

danj180 #s 2,3,5

I have some sympathy with your standpoint about the need to consider tax increases as well as spending cuts. However, this was undertaken by the government in advance of the budget, announced in July, this year. The government only considers tax increases and cuts at the time of the budget. Try also listening to Evan Davis' current discussion on the subject of tax in the current fiscal climate on BBC Radio 4's "Evan loves tax".

The reason that Stephanie's blog and the BBC coverage is focussing on the budget cuts is because that is where government in concentrating its energies currently. The government process and hence the context for the public debate on the subject is the government's "Comprehensive Spending Review" or CSR for short. The news revolves around the leaks and also the facts associated with the policy developments led by HM Treasury in this area: the CSR. Government decisions to be announced in October only relate to its spending plans for the next four years or so. No new decisions on changes in taxation - how it raises money, will be announced or taken.

The government had already made the decision that it plans to address the budget deficit with 80% public expenditure cuts and 20% tax rises. The time for the debate about the 20% element was after the budget statement before the summer. Not surprisingly the BBC is following the Pareto Principle and devoting fourth fifths of coverage to the spending cuts, which will be decided through the current CSR.

To advocate that a journalist such as Stephanie should be currently promoting a discussion on taxation is rather like suggesting that the news desks should be covering the BP Gulf Oil spill daily. This is even more the case since her colleague Evan Davis is covering it elsewhere, not as a subject of daily news, but as a more general discussion of the longer term issues for government over taxation.

I think there has been too little discussion of other options. Neither of the main parties would say during the election campaign how the deficit would be tackled except to say that there would be cuts in public services.

No discussion of why the public sector should pay for the excesses of the private sector.

In my view the Tory/Lib coalition cuts are politically motivated: the drive to have "small government" means that the poor must pay more, while the rich get richer. This is why increases in tax are not on the table - because that would hit the richest, rather than the poorest.

Even last week we've had the usual Tory attack on the "workshy" when most independent estimates reckon that more could be raised by attacking tax-avoidance. But that's the rich, so of course that will never happen. It's politics, pure and simple. I'm just dismayed that there's been no real attempt to oppose the cuts from Labour.

It's come around again, this time at the TUC conference, tax avoidance. Specifically large corporation tax avoidance. This is particulaly relevant because of someone called Hartnet. Yes the same one who said he didn't have to aplogise and then thought better of it. Why him? Because he, personally, let Vodaphone off the hook for a massive £6 billion tax bill which they had tried to avoid via a series of dodgy tax shelters in various tax havens. This, even though his own experts said there was a clearly winnable case to recover the whole amount and not the piddling fraction he got by way of a backroom deal. What we need is demonstrable fairness, not this 'us and them' scenario.
Regards, etc.

#7 paying the same proportion of your income in tax is absolutely fair. The example you gave of everyone paying the same amount is exactly the backwards thinking that got us the poll tax. Where is the fairness in charging a company director earning £10,000 per month the same amount of money in tax as the shop worker earning £10,000 per year. The fairness comes in making them pay the same proportion, not the same monetary amount.

The problem with higher earners is that they pay less that it appears because of the artificial limit placed on National Insurance contributions. At present, I pay 20% tax on everything I earn above £6,475 per annum and 11% NIC on everything I earn above £5,720 per annum.

Someone earning in excess of £37,400 per annum will pay 40% tax on the amount over that threshold, and 11% NIC ... until their earnings reach £43,888, at which point NIC drops to 1% on earnings in excess of that threshold.

If it is deemed right that higher earners should contribute a higher proportion of their earnings in tax to the nation's purse, then why is it also deemed right that they should contribute a lower proportion of their earnings in National Insurance Contributions (that gets progessively lower the more their earnings increase).

Isn't it time that this ridiculously cumbersome and outdated system was got rid of and replaced with a single system of personal income taxation that was actually clear and simple (and fair) for everyone to understand.

Such an adjustment might even allow for the government to finally make tax fair for the very lowest earners in society by taking them out of it altogether.

Why are we even talking about raising taxes even further?

I pay a huge amount of tax out of my income already, increasing VAT will see that extend further. If you do the basic maths, it works out that out of every £1 I earn I give the tax man about 55p (income tax, NI, VAT, Fuel, Duty, CTAX etc etc).

At the same time, I put away money for my own pension, so I am being responsible in looking after my own future so I will not be a burden on the state when I retire (even if the state pension exists then, which it won't).

The ONLY way you will get people like me to pay more in tax is to FORCE those that make a lifestyle choice of living off the state into work. Out of work 6 months..1 day a week cleaning streets, toilets or doing something else useful to society, failure to comply, lose benefits. It's that simple. Move this up by 1 day a week to a maximum of 3 days after 18 months and we lose the problem. It might even give people some self respect.

I have no problem with supporting those with a genuine need, it's the bone idle "life owes me a living" brigade I object to. Get off your backside and do some work!

The total amount of debt created up to press is understood to be in the region of:
Public sector debt £927.4 billion
Private sector debt £1456 billion
Total £2,400 billion

Based on an average interest rate of say 5% (after defaults have been taken into account), the total debt at the end of next year would need to be £2,520 billion.

In a debt based monetary system, contraction of debt means less money and more defaults.
If the government and private individuals start reducing their overall respective debt, defaults will rise and we may again face the insolvency of banks.

To keep a debt based monetary system functioning, the total amount debt in a given system must rise. And if it rises past the level at which the debtors can service the debt, the system must collapse.

So for Mr Osborne, he can’t reduce overall government debt, unless there is a corresponding + 5% rise in private debt.

However given the consummate torture that private debtors are currently being subjected to, their appetite for more debt may well be rather limited.

I suspect that over the course of the next few years we will find out whether (as a nation) we have reached the tipping point in a compound debt trap.

First you find an economist who will show an expanding economy and thus additional revenues in the future to off-set a portion of the debt. This is how the problem was created so it can also be utilized to imagine a solution. There is also that funny accounting that gives the governments profit from the bad loans assumed from the banks. Apparently the banks were unable to discern the future profits and in a gesture of charity gave these profitable loans to the taxpayers. Next will be the cuts to be targeted to those programs and communities currently in disfavor by the ruling parties. Very simple process and used many times before. All will be accomplished with fake tears of compassion and justified to protect the people from themselves. Banking bonuses will be handed out more discretely this year. Of course the banks will be working toward inflation to increase the profits of the money given to them by the governments and loaned back with interest. The status quo will be maintained. The hope is that a major world event will occur so when announced the people will be distracted. Politics as usual.

15. At 3:28pm on 13 Sep 2010, dcacooper wrote

paying the same proportion of your income in tax is absolutely fair.
"The example you gave of everyone paying the same amount is exactly the backwards thinking that got us the poll tax."

If paying the same proportion is fair then why don't we charge rich people more for their food? We need to get away from the notion that what we have to pay is related to what we earn, only then will we be able to move forward.

If we were to play out the idea that we pay according to our means across the entire tax spectrum then you'd just be applying comunist princables by a different method,

With reference to national insurance, there is a maximum the government will pay to individuels so paying after so much income is basically a donation to others.

In short we need to get away from the idea that what we pay for services should be related to what we earn, because it isn't related at all and can only leed to tax avoidance by some people who gets so far up the ladder.

I agree that the cuts need to be fair and the better off are going to have to pay more national insurance and the new 50% rate will affect the higher earners but we must take care not to tax the well off so much they decide to remove themselves, their businesses often and their wealth abroad. This is already happening. I know quite a few people who are middle income earners, by that I mean 40-50K per annum who are emigrating to countries who do not tax the better off as much as the UK. Tax evasion will increase as the rich can easily hide their wealth and the HMRC do not have the resources to battle this. The underlying ideology is that people have to start taking responsibility for themselves. We should be saving for our retirements, not taking out unaffordable borrowing or and taking every opportunity to better our skills to make ourselves more employable. The country needs to be more equal but people have to realise that sometimes people are better off because they have worked hard and not penalise them financially for that. Otherwise we may have a country full of welfare claimants and public sector employees and no one building up the economy. It is a myth that the public sector cannot be cut. I have worked in both and I can tell you that many public sector workers are complacent and would not last five minutes in the private sector where efficiency is at the forefront.

At 1:47pm on 13 Sep 2010, jan wrote:
As for raising taxes - well expect skilled workers and senior managers to be beeting a path to the exit ports, many already have and more will do so, since there will be very few left to run things round here, industry will suffer even more than it already is from a skills shortage, there will will be no one left to spend so retail will decline.


I started work in 1968 and, if my memory serves me correctly, the basic rate of Income Tax for the first few years of my working life was in excess of 30%. The top rate of Income Tax was somewhere in the region of 75%.
It's a wonder that, considering the mass exodus such rates should have caused, there is anyone left living in the UK at all. The entire population should have beet *beat a hasty retreat all those years ago.

Nevertheless, I and many like myself, on small incomes (round about £350 per annum) managed to scrimp and save enough money to get married, buy a (very small) house and raise a family. Still, we didn't have all that credit card debt to pay off because we understood that if you wanted something then you saved for it.

Ref comment 15

If you think that the NIC cut from 11% to 1% above the threshold of £43,888 is unfair, when you begin to pay tax at 40% from £37,400, I'm afraid you're mistaken. The total income tax and NI paid by higher rate taxpayers is a much higher proportion of income than for basic rate taxpayers.

Imagine you earn a million pounds a year - most of that is taxed at 40%, with most of the NIC at 1% - your total income tax and NI burden will be around 40%. If you're a basic rate taxpayer paying Income tax at 20% and NI at 11% that is much lower. The tax free personal allowances also have a much greater effect for the basic rate taxpayer.

On the BBC bias points - They are obviously biased - if you look at the coverage as "cuts" it is extensive but the need to "Reduce the borrowings" rarely gets mention. Big headlines about fighting the cuts rather than how the cuts are to be fairly distributed as the Coalition would say.

Similarly on the "How would you cut costs" the cut's are measured in "reduction in Pensions" and "days running hospitals" these descriptions would alarm people who look at it but in reality the Coalition is unlikely to make cuts by "cutting" pensions or shutting hospitals for days but the descriptions would make people think that is going to happen.

I'm not for the cuts but this way of reporting is very alarmist. I'd just like to see a less bias in the reporting so we can make up our own minds.

danj180 you are absolutely right that we must talk about tax. My conclusions may well be radically different to yours on tax but a proper debate is essential.

#15 wrote "If it is deemed right that higher earners should contribute a higher proportion of their earnings in tax to the nation's purse, then why is it also deemed right that they should contribute a lower proportion of their earnings in National Insurance Contributions (that gets progessively lower the more their earnings increase). "

That is because of the fiction that NI contributions are paying into a fund from which we are allowed to draw when we stop earning as much (covers pensions for example). It follows logically that once you are paying in more than your possible drawings (plus an amount to cover for other people's shortfall in contributions) then there is no need to pay more.

It is a total fiction but one that all political parties maintain, partly because the alternative is to have to admit what the true rate of tax is and partly because it allowed Labour to increase NI (which is a tax on income) and at the same time claimed they had not breached their manifesto (no increases in income tax).

It is an absurd fiction and I would combine employee NI contributions into income tax (which would save on some civil servants as well).

#19 whilst I would prefer a flat rate of income tax (and the evidence of countries that adopted it is very positive but, and this is an important but, they were not as sophisticated as the UK economy so exact comparisons are fraught with difficulty) your point about the poll tax is very important. The best form of tax is one which raises a lot of money cheaply. It has long been the cases that it is easiest to raise a small amount from a lot of people than a large amount from a few. However, if people consider a tax to be unfair the cost of collecting rapidly increases. It is a difficult balancing act

Dempsters post looks to be flawed. You have assumed the contraction of debt necessarily leads to defaults? It does not have to do so.

The Labour years of public spending beyond our means caused people to become dependent on that extra money. Rather like the recent errors at HMRC over tax, ideally the money would be asked back (over say 3 years, like the HMRC mistake). In my opinion so much of the spending was a 'mistake' and we need to roll back to where we were before, trying not to hurt those dependent on the extra money that's no longer available.

The UK is running a continual deficit, I think around 150bn tax shortfall this year, continuing each year like that. The £83bn over the next 5 years, say £16bn each year will mean our overspend each year will be £134bn instead of £150bn and those overruns will be added onto what is around £900bn running total each year so it's all rather insignificant these cuts when we look at how much we're still spending beyond our means.

Tax levies and growth amounting to £134bn each year is really needed to fill the gap (based on the figures I've used, which I think are roughly correct). I can see the banks providing a great deal of that but cuts alone won't.

However, I maintain that cuts should be such that we return to where were, like the HMRC will do individually, but for our national deficit.

Cuts should be everything that isn't necessary, where costs excallated to meet available funds, where wage inflation and unnecessary spending took place it should be re-wound.

The Coallition appears to be doing this. They also appear to be stimulating the weaker cities to support the removal of predominantly public sector jobs. The trouble is I don't see how jobs are going to be easy to create.

If the Govt really wanted to expand the UK economy it requires great leaders of industry to develop the R&D output of our universities. Alot of new technologies developed in and around Cambridge by world leading experts are simply not fully developed. It Labour had invested in that rather than a public service sector, to make everyone's life pleasant, Labour might have built something for our future. The Coallition can still advance the development of research output from Universities into very successful products which we've always been poor at doing. Taking these fledgling ideas and making them really fly is what might save us, but it needs 'careful' spending/investment in reformed/efficient businesses, not simply the public services which only ever need to work adequately and cost effectively.

Again, the scale of the running deficit needs addressing and it will take years to fix, but the big money must come from the banks, either through sale, tax or investment/lending to new industry.

9 Watriler,
I like your phrase 'reactive impedance'. It seems to illustrate a 'pro-cyclical' economic policy like the current one. Good macroeconomic policies need to be counter-cyclical, as this means instead of targetting the deficit directly through cuts/taxes, you target its cause. The cause is a lack of aggregate demand in the economy and private indebtedness, and that requires more government investment not less.

Charlie

"Isn't it a possibility that some more of the deficit reduction could be done through tax increases."

No, because taxes don't fund anything. It is a myth that exploits the fact that you think government spending works like your own. It doesn't.

When a government spends £100 on its magic credit card, it has an amazing cash back deal which means it gets a percentage every time that same £100 is spent by somebody else.

So the government spends it with the teacher, and gets a percentage back. The teacher with Tescos, and gets a percentage back, Tescos with its staff, and so on.

The result is a logarithm progression to zero that means very simply that every time the government spends £100 it *always* gets £100 back in tax whatever the rate of tax is (as long as it is positive).

So why do we have a deficit? Simple - its a timing problem. What has happened in the economy is that people are saving in Sterling overall and that means there is a deficit.

The deficit is our net savings. If they reduce the deficit, they reduce our capacity to save overall.

Simple, basic accounting.

@Demspter

"So for Mr Osborne, he can’t reduce overall government debt"

He can. He owns Sterling. Sterling is a fiat currency. Sterling is simply a government bond - non-dated and non-interest bearing. It's just an asset swap changing gilts for cash, much as it is cash for gilts. The cash was already on the BoE's balance sheet, since they issued it in the first place.

All net Sterling assets in issue are 'government debt', or more properly 'government equity'.

29. At 6:50pm on 13 Sep 2010, Neil Wilson wrote:
Neil Why do the Govt issue the gilts. Is it ignorance or is something else going on? Whats your take?

DEMPSTER ,

Why does the level of debt need to continuously rise to keep the current system working?

Other countries don't run deficits or have more private debt than savings and they have the same money system that we have. Money is a promise to pay whether it is government printed or private bank (licensed and regulated by government) printed. It is ultimately linked to the perceived value of a nation's goods and services.

I agree that recent derivative and ponzi schemes have threatened the real economy and banks and other financial institutions need to be prevented from doing this in future but I don't see how your assertion that debt has to keep on increasing is true.

NEIL,

You talk as though we are a closed economy and the world uses sterling controlled only by the UK government. It doesn't work like that. We are dependent upon world trade in particular imports of essential food and commodities and manufactured goods. We have been consuming these beyond our ability to pay back to the rest of the world, hence our deficit and private debt. Government bonds are bought to a large extent by international investors and wealth funds and they require interest in return for their outlay.

So sterling is enslaved to world perceptions of it's value (exchange rate) and not purely controlled by the UK government and in effect not therefore obligation (debt) free.

If the world believes the UK is on the up in terms of what it has to sell on world markets Sterling's relative value will go up. But, as has been the case for the last few years the markets see our level of public and private debt as a sign of our weakness and so sterling is down against a basket of world currencies and there is market concern about our willingness to live within our means. (Balance our books)

The world economy is interlinked. No nation particularly ours is an island economically or fiscally.

How can we identify the ones who have made a lifestyle choice not to work when there are so many unemployed. Surely, the government has made the lifestyle choice for the country that a proportion of the population will be unemployed. Perhaps when I see someone who is unemployed, I should be glad that they have not got my job. But this government wants to turn attention away from its own responsibility and blame the unemployed.
When it comes to tax, those who benefit the most from the way the country is managed by getting the biggest salaries should pay the most.
I am sorry for repeating that democracy is about giving up the opportunity of fighting for what you want in exchange for an equal share given peacefully. For too long, this contract has not been fulfilled and, while some have never been given their fair share, others have had many times theirs. This government seems as though it does not understand that and appears as though it wants to victimise the weakest in the present situation.

Why doesn't the Government look at closing the final salary pension scheme for public workers? Its clearly unaffordable, its vanishing from the private sector and the pay divide between public and private is all but gone, no real argument exists to keep it. It would lead to long strikes, but the short term pain is better than salami slicing it over a long period.

34. At 7:54pm on 13 Sep 2010, MLPiggin wrote:
Why doesn't the Government look at closing the final salary pension scheme for public workers? Its clearly unaffordable, its vanishing from the private sector and the pay divide between public and private is all but gone, no real argument exists to keep it. It would lead to long strikes, but the short term pain is better than salami slicing it over a long period.
>>>>
MLPiggin,

I think the government are only going to fight the battles carefully. The public sector pensions will be tackled eventually but the first fight will be cuts in public sector employees. This clearly reduces the potential pension burden from the public sector but the government are not likely to make it more difficult to get acceptance. I am sure there will be massive strikes but not yet a revolution (hello to WOTW!)

FAIRSFAIR,

Those that earn the most do pay massively more tax than the poor. Some get away with some tax but most don't.

Take for example an entrepreneur such as James Dyson. He has worked very hard and taken a lot of risks with his own money and possessions over the years to build a successful business.

He creates jobs by his inventiveness and industry. He pays the government more than 1 pound in every 8 that he pays to his employees in wages (employers national insurance contribution). His employees then pay income tax which he collects for the government for free as an unpaid tax collector (PAYE + NI). He and his employees pay all indirect taxes when they spend on anything (VAT etc).

His company pays corporation tax (currently 28%) on any profit it makes every year. He then pays 50% tax and 11 % national insurance (tax) on any salary he earns and 32.5% tax on any dividend he pays himself from the profits of his company.

Add that all up. It's multi-millions per year.

He doesn't consume any more government services than most others (less than people on benefits or with children in state education). He more than contributes to the state.

I would argue in fact that there should be a tax cut-off of say £1million personal tax per annum. Once you've paid that fair dues.

We would have shed loads of billionaires in Britain spending and employing in our economy. But the socialists (wealth envy) would never wear it.

31. At 7:03pm on 13 Sep 2010, Sage_of_Cromerarrh wrote:
DEMPSTER ,
Why does the level of debt need to continuously rise to keep the current system working?

97% of all money is created as interest bearing debt.
Therefore the only way one can ever re-pay capital and interest is to create more debt (original debt + interest = new debt).

Whatch 'money as debt' or 'The secret of oz' or read Murray Rothbard's the mystery of banking, all of which are freely accessible over the internet.

A short animated film by Paul Grignon, ‘Money as Debt’ (link below).
https://www.youtube.com/watch?annotation_id=annotation_942534&feature=iv&v=z5vC_8azMFk

The documentary Secrets of OZ, explains our debt based system of government finance, this is nearly 2 hours long, but well worth watching (link below)
https://www.youtube.com/watch?v=D22TlYA8F2E

We have a major splash over the BBC and over media selling the cuts. We have weeks of scaremongering and u turns over the extent of the cuts and "who" will be dealt with, the workshy, the housing benefit receivers, the disability claimants.

So that deals with the unworking class and placates the working class.

We then have the job threats, the overburdened public sector, the NI increase.

So that deals with the working class and placates the middle class.

We then have the education cuts, the asset devaluation and the SME business closures.

So that deals with the middle class and placates the plutocracy

Communicate, over hype, scare and counter until every person is so incentivize that the scale of the cuts will be done under the general anesthetic of brainwashingWe have a major splash over the BBC selling the cuts. We have weeks of scaremongering and u turns over the extent of the cuts and "who" will be dealt with, the workshy, the housing benefit receivers, the disability claimants.

So that deals with the unworking class and placates the working class.

We then have the job threats, the overburdened public sector, the NI increase.

So that deals with the working class and placates the middle class.

We then have the education cuts, the asset devaluation and the SME business closures.

So that deals with the middle class and placates the plutocracy

Communicate, over hype, scare and counter until every person is so desensitised that the scale of the cuts will be done under the general anesthetic of brainwashing and they will not realise that the cuts are actually slashes

Dempster,

I've watched the stuff you have suggested and found it bankrupt in explaining a modern multi-national trading marketplace.

The Americans who made it seem to think the world is America and ends at the Statue of Liberty and the Golden Gate Bridge.

Fractional banking only "allows" gearing of the original debt to the multiples stated on the video, it doesn't mandate it. If the appetite for debt is not there it won't be taken up in full surely?

The idea must be that the debt facility is there for sensible borrowing for sustainable investment not the ridiculous and unsustainable over consumption that it is all to often used for by consumers public and private.

#37

Dempster,

we did not really expect an answer, but here's another question:

in ~17 you said 'If the government and private individuals start reducing their overall respective debt, defaults will rise and we may again face the insolvency of banks.'

Why on earth will defaults rise if debts are repaid, surely they should fall?

25. At 5:25pm on 13 Sep 2010, Steven_of_avalon wrote:
'Dempsters post looks to be flawed. You have assumed the contraction of debt necessarily leads to defaults? It does not have to do so'

I think it does:

97% of all money is created as interest bearing debt.
Therefore the only way one can ever re-pay capital and interest is to create more debt (original debt + interest = new debt).

Defaults are now at very high levels, and interest on existing loans is being increased dramatically to try and stop the rot. That’s why people are now being charged 7.5% on mortgages, 19% for overdrafts and 25% for credit cards.

The increase in interest charges for those still able to service the loan is to compensate for the defaults.

Remember the BOE base rate is at a historic low of 5%.

33. At 7:41pm on 13 Sep 2010, Fairsfair wrote:
How can we identify the ones who have made a lifestyle choice not to work when there are so many unemployed. Surely, the government has made the lifestyle choice for the country that a proportion of the population will be unemployed. Perhaps when I see someone who is unemployed, I should be glad that they have not got my job. But this government wants to turn attention away from its own responsibility and blame the unemployed.
When it comes to tax, those who benefit the most from the way the country is managed by getting the biggest salaries should pay the most.
I am sorry for repeating that democracy is about giving up the opportunity of fighting for what you want in exchange for an equal share given peacefully. For too long, this contract has not been fulfilled and, while some have never been given their fair share, others have had many times theirs. This government seems as though it does not understand that and appears as though it wants to victimise the weakest in the present situation.

>>>>

FairsFair,

I like your definition of democracy but have one question in regards to it:-

If someone is currently not contributing what do they have to give?

Based on interest on existing loans is being increased dramatically e.g. people are now being charged 7.5% on mortgages, 19% for overdrafts and 25% for credit cards (all these are approximate).

Remember the BOE base rate is at a historic low of 5%.

Assuming that a country can’t increase its GDP due to external factors.
I wonder if what we’re seeing now is a collapsing debt ratio (CDR).

And I wonder if (in years) that is the inverse of the average interest rate on debt?

This blog is fascinating stuff. One thread seems to be why doesn't the Chancellor consider closing the deficit by extra taxation over and above the mooted VAT hike. The rich should pay more. Well apart from the wealthy Non Dom's they do pay more. We have a graduated tax system, I am led to believe.

Anyone with an income above about £44000 is a higher rate tax payer. If that person is fortunate to earn more than about £120,000 he pays an even higher rate - that is tax at 50p in the pound. Okay, so you don't feel sorry for him but the more you earn the less proportionately you get.

However over the last ten years or so, we have all been paying far more tax than we used to. You know why! Fiscal drag through not increasing our tax allowances and stealth taxes - fuel duty and Local Authority Taxes comes to mind.

There must come a point when we stop getting bled dry by the Government and we get to keep our money at the same level OR better still we start to reduce taxes to put more money into the economy and give less to greedy and wasteful Government.

Not much has been said about the effects of this tax grab over the last ten or so years. Well we must have lost so much revenue from Corporates with these policies. When we get the deficit under more control we need to start competing, taxwise, as a nation in the world economy.

Holland has been cited as one of the strongest economies in the EU. Why? Partly because they've kept Government spending under control but also because they have a very competitive Corporate Tax approach.

Instead of always doing the obvious, why don't we start looking at how others manage to keep their head above water, when we have chucked away all the benefits we gained with so much difficulty in the 80's and 90's.

I know this view will not be popular - I shall get the usual shellacking from the Leftie brigade but it worked in the past and we became more wealthy through reduced taxation policies.

Dempster,

You may well have just mistyped but the BOE base rate is actually 10 times lower than you have stated on your last two posts. Its at 0.5% and has been since March 2009.

Zebedee says its time for bed for me. Bye for now

42. At 9:19pm on 13 Sep 2010, EmKay

'What do they have to give'. That is a loaded question in itself. Who decides 'what' is giveable?

Sometime in the past we decided to stop fighting for what we wanted and agreed to argue peacefully for our fair share of resources. We then agreed to have representatives argue for us so the rest of us could carry on our work. If that contract is broken, then we can return to fighting.

We give our acquiescence.

If I am walking down the road and a much larger person come along, I do not expect him to use his greater physical abilities to take money from me. In a civilised, democratic society, greater intellectual ability should not be used to take money from those with less intellectual ability. That is where our present system is failing.

36. At 8:35pm on 13 Sep 2010, Sage_of_Cromerarrh

It is our present version of Capitalists that are wealth envious. That is what our present version of Capitalism declares to be a virtue – get more for yourself. Millionaires wanting to be billionaires on the backs of those they employ ‘out of the kindness of their hearts’. The ones who actually do the work are the ones who create the wealth. They support the companies, the chief executives, the banks and all the financial establishments speculating on the wealth that they have created.
Those at the bottom of the heap have been conned out of the fair share that democracy should have given them.

#41

Dempster said
'Therefore the only way one can ever re-pay capital and interest is to create more debt (original debt + interest = new debt).

Defaults are now at very high levels, and interest on existing loans is being increased dramatically to try and stop the rot. That’s why people are now being charged 7.5% on mortgages, 19% for overdrafts and 25% for credit cards.'

Neither assertion makes any sense. Debt is repaid by spending less than is earned, the same as debt is increased by spending more than is earned

Similarly higher interest rates will increase defaults not reduce them!

13. At 3:03pm on 13 Sep 2010, Dogbertd wrote:

"I'm just dismayed that there's been no real attempt to oppose the cuts from Labour."

I'm not, given that they got us into this situation, maybe they should be quiet for a bit. Plus this Millibands are too busy squabbling over the Labour party like a train set. Born to rule - who says feudalism is dead(ward)

16. At 3:55pm on 13 Sep 2010, iain may wrote:

"Why are we even talking about raising taxes even further? "

Because it is the easy option. Rather than admit that the Labour government overspent and wasted billions, promising people more and more entitlements to gain votes. It takes an adult to say no more.

20. At 4:43pm on 13 Sep 2010, juliet50 wrote:
"the new 50% rate will affect the higher earners but we must take care not to tax the well off so much they decide to remove themselves, their businesses often and their wealth abroad."

It is only through the removal from this country of every private employer and anyone who privately earns more than £50k that we can realise our dream economy - a potent mix of NHS, academics, postmen and fairness. That will learn them.

28. At 6:41pm on 13 Sep 2010, Neil Wilson wrote:

"So why do we have a deficit? Simple - its a timing problem. What has happened in the economy is that people are saving in Sterling overall and that means there is a deficit.

The deficit is our net savings. If they reduce the deficit, they reduce our capacity to save overall."

The best yet. There was me thinking that we had low savings and the deficit was caused by borrowing money from the world to buy tat that we didn't need and pay people to sit at home watching people on TV, in other countries making that tat, for less than the viewers get in benefits.

33. At 7:41pm on 13 Sep 2010, Fairsfair wrote:

"Surely, the government has made the lifestyle choice for the country that a proportion of the population will be unemployed."

Do you expand on this theory further in your book "the end of personal responsibility"

"For too long, this contract has not been fulfilled and, while some have never been given their fair share, others have had many times theirs."

Could you provide a link to this contract, I do not remember signing it or reading it in school?

The fallacy is there is a large pie of fixed size and everyone is born with a right to an equal share. The pie actually grows through human endeavour and invention and hard work. Is there more wealth in the world now as opposed to stone age days? There would not be if the cavemen sat around ensuring they had an equal share of the (brontosaurus) pie.

To Both
39. At 9:06pm on 13 Sep 2010, Sage_of_Cromerarrh
40. At 9:11pm on 13 Sep 2010, AnotherEngineer

All money other than hard currency (notes and coins) is created as debt bearing interest.
And I understand that notes and coins represent 3% and debt 97%.

To satisfy the debt annual for example more ‘new money’ has to be created, assuming of course banks don’t fiddle their balance sheets (and this may be what ultimately occurs to protect the debt based system), because interest has to be paid on debt.

Every year debt + interest (less defaults) = new debt

If it wasn’t so then there would be less money and hence non-transferable assets based in such a country must go down in value, whether it be labour, houses or anything else which can’t be transferred.

46. At 10:13pm on 13 Sep 2010, Fairsfair wrote:
"If I am walking down the road and a much larger person come along, I do not expect him to use his greater physical abilities to take money from me."

But it is ok when the government do it?

Still I am curious, maybe someone else can help me.
In a country with a static GDP and a debt based monetary system, is the collapsing debt ration the inverse of the average debt interest rate in years?

This article could equally be entitled

'Reducing the deficit, a long way to go'

It could then go on to discuss the annual cost of 800 billion debt, how this will increase over time and how interest payments already cost as much as defence and will cost as much as education. It could state what we save in interest payments for each five billion not borrowed - and how many jobs that might equate to.

It could suggest that maybe all sorts of allowances, and freebies could be reduced or eliminated for those with net household incomes over say £18k (net income for those on average salary) and what that might save without much impact on jobs or unemployment benefit.

It could suggest the level of savings that could be made if the maximum a government employee could earn was say £150,000 (and I include the BBC, quangos, local authorities, and any other body in receipt of large subsidy from the state through grants or payments etc.) And to be frank, who would complain about this - maybe 20,000 at the top, not in a union and it might save a quite a few teachers and nurses and reduce future pensions liabilities.

It could suggest that we do not replace PCs in schools, that children should learn to do mental arithmetic and spell and write by hand and look things up in books. How terrible would that be? There'd be some significant savings, a few jobs lost but the IT techs could help out with more PE lessons thus helping to reduce the potential for childhood obesity.

It could suggest that total parental income be considered when assessing what support students get for fees to go to university rather than the current approach

It could suggest cutting the educational maintenance allowance - why the heck are young people being paid to stay on at school and what that might save.

It could suggest that in the past councillors and quango board members VOLUNTEERED and it could estimate what could be saved if they had such civic pride again and how many local authority jobs could be saved as a consequence.

It might suggest that we could turn the street lights off after midnight - its green and cheap and we used to manage without them perfectly well. Also get rid of all the LED displays that have sprung up all over the health service. All lighting in buildings off at night and nothing on standby. No cabs or mobile phones for government employees (any organisation). Travel by bus. Use the phone at work. Give out the office number not a mobile.

It could suggest that means testing might be a way forward - that would stimulate debate.

It could suggest that the safer neighbourhoods policing initiative has enabled far too many policemen to wander safe neighbourhoods and that there might be a reallocation of resources. That might stimulate some debate.

It might argue that perhaps there should be VAT on food to reduce consumption and raise revenue.

It might argue that licensing hours should be reduced to limit alcohol consumptio, reduce crime and NHS costs.

It might argue that alcohol duty should be massively increased, that there should be minimum prices for cans and bottles that the drinking age should be increased to 21 for the same reasons.

It could ask whether we agree that if people build up assets over their lifetime, they should be expected to use them to fund their needs in old age

Perhaps we should challenge whether there should be subsidy for child care. When? Why? Who?

It need not be a long way to go and there are plenty of places to visit. My daughter and I could find money all over the place that funds nice to haves not essentials and we could maintain support for the needy at the same time.

Its a great shame that media commentators seem unable to present any view but the status quo of spending, the conventional wisdoms, the perception that it will all be horrible if things are different.

Things were different. Look at expenditure and revenue for 2002/2003. Things weren't so terrible then, were they? We could go back to that.

You are correct Mrs Bloggs, if you can't come up with £155Bn of savings to public spending each year you really aren't trying.

46. At 10:13pm on 13 Sep 2010, Fairsfair wrote:
42. At 9:19pm on 13 Sep 2010, EmKay

'What do they have to give'. That is a loaded question in itself. Who decides 'what' is giveable?

Sometime in the past we decided to stop fighting for what we wanted and agreed to argue peacefully for our fair share of resources. We then agreed to have representatives argue for us so the rest of us could carry on our work. If that contract is broken, then we can return to fighting.

We give our acquiescence.

If I am walking down the road and a much larger person come along, I do not expect him to use his greater physical abilities to take money from me. In a civilised, democratic society, greater intellectual ability should not be used to take money from those with less intellectual ability. That is where our present system is failing.

>>>>

FairsFair,

I think what I was trying to get at is if there are people who are not contributing but living on benefits (and not disabled etc, just caught in the poverty trap or 'benefit scroungers - choose which description suits your biases) how would you expect them to contribute. People will give them a share of their 'pie' as they currently do through taxation but what do they bring to the party? How can productive people be happy sharing an equal part of their 'pie' with such people when there is no likelihood the recipients will reciprocate?

I see a clear moral hazard in the way the current benefits scheme is loaded - the best way to receive the greatest benefits is have lots of kids and no permanent partner.

54. At 10:51pm on 13 Sep 2010, truths33k3r wrote:
You are correct Mrs Bloggs, if you can't come up with £155Bn of savings to public spending each year you really aren't trying.
>>>>

Actually, the tricky thing is finding the savings AND getting re-elected at the next election - the government is full of politicians after all!

https://www.europac.net/media/video_blog/dollar_bond_bubble_stimulus_krugman

Peter Schiff (from 4 mins in) explains why stimulus does more harm than good.

truths33k3r,
All i've seen you write so far are political points - you go onto an economic blog - about macroeconomic principles - and you respond with mere 'political' flippant and facetious satirical fallacies. Oh well, each to his own.

The truth is this. By this time next year we will know if cuts/taxes are improving our situation. I predict at least 2.8 million unemployed (possibly much, much higher if the cuts cause a double-dip), and all because the current government took too much money out of the economy generally, and particularly out of aggregate demand.

I'll give you a challenge - explain the difference between microeconomics and macroeconomics. If you can understand this you might understand what we mean about 'taking money out of the economy'.

Kind Regards
Charlie

@53 mrsbloggs13c2

A thoughtful list that I can happily, for the large part, endorse. (I would need more time to ponder about the VAT on food idea).

Can I be permittted to add an extra:-

Driving without insurance - immediate confiscation and destruction of vehicle. No excuses, no exemptions. Immediate crusher treatment. Immediate and made to watch.

I realise this is not practicable, as there are not enough public crushers available, but this is a breach of public duty that really gets under my skin.

Capitalism vs Collectivism

In the debate on the above which has been going on for months on these blogs, it is interesting to note that at heart the issue is about resource allocation.

In capitalism, resource allocation is based on how many units of currency you have irrespective of whether you earned it, stole it or inherited it. the problem with this system is that, unregulated, it results in concentration of capital in the hands of a few with most dispossessed.

In collectivism everyone is granted (theoretically) an equal share of the pie and could in theory do away with currency (although there would still have to be some way of fairly sharing out resources)

There have however been lots of comments about 'debt slavery', usually with respect to Fractional Reserve Banking (hello Dempster) or sometimes more generally, i.e you have to earn money to live. There have been a few utopias proposed but the crux of the issue is private ownership - i.e whether or not people are allowed to 'own' anything or are merely allocated what they need to survive. Now under collectivism there is no free lunch - everyone would have to work to some degree and what about those people who don't work out of choice- presumably they don't eat otherwise why would most people do anything? This I fear is the stumbling block of collectivsm - for it to work it needs to be fairly dictatorial with fairly harsh punishments (ie starvation). Thus this is actually fairly similar to the situation under capitalism with the only difference being the distribution of resources is flatter -provided the people at the top making decisions don't decide to award themselves extra resources for having to 'work harder' (sounds familiar does it not?).

As for me, private ownership is not something I am likely to volunteer giving up. Why? I am NOT wealthy in a financial sense but private ownership (at least what is not mortgaged) does offer some sense of security. Am I worried about debt slavery - no. I actually enjoy working (I am a plumber) and get pride out of my work (for myself - I am self-employed). Collectivism runs the risk of taking individual pride out of work but more importantly that certain sections of the population are discriminated against and have resources removed because they do not agree with the orthodoxy at the time and thus have nothing to fall back on since they don't actually own anything.

Just a few thoughts from an insomniac.

EmKay (not from Hendon)

Why should people earning more than £50K pay more and more tax? why should I as a higher rate tax payer pay more tax to support the deficit? I am not against paying a fair share to receive good public services. But I do object to paying ever increasing tax bills to support the work shy, benefit cheats, or the vastly over inflated civil service, now before we hear a massive outcry over the statement of a vastly over inflated civil service, I am not talking about Doctors, Nurses, Teachers, Police, Fire or any other critical staff.

Can someone explain why we need roughly 68,000 civil servants in the MOD? that is roughly 1 civil servant for 2.6 active service personnel. That is not including the 1900 in the MET office, DSG, DSTL, or even the 1000 staff in the UK Hydrographic Office.

Other departments
83,000 HMRC
6,500 DVLA
133,500 DWP

These figures have been rounded up and are based on approximate figures given in a written parliamentary answer in 2009 and does not include the increases that were pushed through in the last 6 months of the labour government, roughly 530,000 civil servants in Q4 2009, it has to be rough figures as the government has not been able to provide accurate answers. These figures also exclude, temp's, contractors and consultants.

13. At 3:03pm on 13 Sep 2010, Dogbertd wrote:
"I'm just dismayed that there's been no real attempt to oppose the cuts from Labour."

Insert the word Nu in the appropriate place and I think you have your answer

Do you really think there is any meaningful difference between politicians these days whatever label they choose to promote themselves under?

61. At 01:54am on 14 Sep 2010, Secr3t wrote:
Why should people earning more than £50K pay more and more tax? why should I as a higher rate tax payer pay more tax to support the deficit?
------------------------------------------------------------------------
Because you and people like you have been paying less and less tax for at least fifty or sixty years, and arguably over the past hundred years.

And yet you want the Government (or you vote for Govts.) to provide a high level of services. These have to be paid for somehow.

In 2007/08 we had a strange coalescing of high fuel prices, rising food prices, soaring housing costs (incl. Council Tax) and tax rises on the low paid which contributed to the credit crunch. People stopped spending, people paid less tax, people stopped paying mortgages, people stopped paying credit card bills or payments on short term unsecured loans.

It is possible (bad loan selling, CDO creation, etc., notwithstanding) that had the high paid - who had enjoyed an unprecedented period of prosperity, low taxation and wealth creation - had paid more tax, the credit crunch might have been avoided, in large measure if not almost entirely in this country.

In addition, because you and people like you do not want to pay income tax and higher rate income tax, successive Governments have had to fund their spending by switching taxation to other things, especially Council Tax, VAT and fuel duties. These all hit the poorest and lowest earners more than the wealthy and high paid. The last of these, fuel duty, also make our economy extremely vulnerable to hiatus and upset and downturn, because oil prices are more volatile now and can be suddenly upset - increased - by all sorts of things.

A lot of people are saying that recovery from the mess we are in will come from business growth - including import/retail which is one of the largest 'drivers' in our economy - which is driven by spending. If you stop the mass of the population - who earn £24,000 or less - from spending, (by having to pay too much tax) you actually create economic downturns or collapses which then also hit a lot of the wealthy and high paid.

It is actually in your self interest to pay a bigger (some would say fairer) share of the tax burden. A healthy, steady, consistently prosperous economy would actually benefit everyone more - you included!

Charlie:

"Good macroeconomic policies need to be counter-cyclical, as this means instead of targetting the deficit directly through cuts/taxes, you target its cause. The cause is a lack of aggregate demand in the economy and private indebtedness, and that requires more government investment not less."

Agreed, but the current government have to go against that because Labour didn't fix the roof when the sun was shining. They overspent during the top of the cycle.

Please don't respond "all the more need for it then" as the above makes it next to impossible, however desirable it is to just borrow more and pay loads of people to do little of value.

re #58
Funny! I woke up this morning thinking about all sorts of things including this:

Economics is about choices. The management and use of scarce resources.

Politics is about framing the decisions about the choices and finally making the choice.

Hope this helps. :-)

S3cr3t - you ever worked for a government dept in a basic office role? Note this is +not+ aimed at teachers / firemen / etc! More power to the doers.

I have - it's really very easy, inefficient and boring. Two comments from mates:

moved to DoE office role from private sector: "it took me a long time to get used to how little work they gave me"

Used to work in MoD in IT - it was boring and we didn't do much but it was great in the respect that whatever you said you needed they would just get it, whatever the cost.

#56

Perhaps one term is all that is needed

Career politicians get too close to too many vested interests...

The motoring lobby
The housing lobby
The police
The armed forces
Teachers
Pensioners
Disabled
Working mothers
Non working mothers
The public transport lobby
The social housing lobby
Bankers
Farmers
Oilmen
Union members
The civil service
The unemployed
Those with dyslexia, those without
Doctors and nurses and dentists

or any other group you care to mention

Anyone who’s watched ‘Money as Debt’ and ‘The secret of OZ’, will likely conclude that they have their roots firmly in Murray Rothbard’s book, ‘The Mystery of Banking’.

There is one striking difference of course between the ‘Secret of OZ’ conclusion and those of Rothbard, namely a gold backed currency.

However the date issue will likely point to the reason. In Rothbard’s day most nations held reserve gold, now they likely don’t.

Oddly enough Rothbard’s book does give us an insight into why the recent £200 billion cash injection into the economy did not work (other than keeping government funded that is).

Rothbard explains, that people’s perceptions of what is, or is going to happen can drive their reasoning as to whether they should hold or spend money.

It is this people element which I find interesting.

In a debt based monetary system, the hope is that by introducing more money into the economy, banks fractional reserve base will be increased, thereby allowing them to pyramid up more loans.

So by introducing more money, banks can lend more.
In theory this should of course work, but it misses out one fundamental element.

Banks can only lend more money if people actually want to borrow it.

Now given that we’re heading into a major recession, possibly even a depression, and that banks are currently crucifying borrowers with high interest charges (BOE base rate 0.5%, mortgages 7.5%, overdrafts 19% and credit cards 25%); it would be financial suicide to become mired in debt in these circumstances.

So whilst the stimulus package of £200 billion has likely increased the amount banks can lend, the prudent are unlikely to want to borrow it in these circumstances.

That leaves the bank’s potential borrowers possibly falling into the category of the marginally sensibly to the completely bewildered.

And the problem with lending to them is, you may not get the money back, let alone the interest.

So whilst I don’t hold with Rothbard regarding the gold standard (principally because as far as I know we don’t have much anymore) his introduction of human behaviour, is a very interesting observation.

MrsBloggs is very astute in her observations and is making real suggestions about specifics that need discussion and urgent action.

The majority of posts on these recent threads about rival political systems and monetary systems are all deck chair arranging on the titanic.

The looming energy crisis is an iceberg that will sink all of these systems. But at the moment it's captain Smith at the helm (aka Mr Cameron, Clegg, Blair, Brown, Milliband, various union leaders - take your pick) saying full speed ahead let's set some more records.

#63

There is another way of looking at who contributes what other than the tax rate.

Someone earning £20,000 will pay about £2500 in tax and national insurance

Someone earning £50,000 will pay about £13,000 in tax and national insurance

Someone earning £200,000 will pay the best part of £100,000 in tax and NI

Those earning more, do pay a bigger share

The person earning 50k pays about 4 times the one earning 20k and the one earning 200k pays 40 times more.

and maybe I've got the numbers wrong and its three times and thirty times it still is more, proportionately.

If you want to take a look at people paying more and things being fairer...

You could be retired on an income of 20k and pay no national insurance, likewise any income level. In addition, you'd get a range of 'entitlements'. A retired person over the age of 65 would be much better off than their young counterpart starting out in life.

Is that fair or equitable?

re #68
Good post.

re income tax and fairness
tax is never going to be fair, but then nor are incomes. Some people earn lots because they are clever come up with brilliant ideas for companies that create useful or interesting products and employ lots of other people or for being a brilliant headteacher who raises education standards for hundreds of pupils. But unfortunately many get lots of money just for being clever at talking themselves into a high paid job or being clever at fleecing others.
Tax has to raise more from the wealthy as they have the money, but it cant be punative on the rich as we still need to encourage people to be excellent, we need to be more careful about the salaries of public sector and as a culture frown on excessive salaries for those who dont deserve them.

# 66. At 07:44am on 14 Sep 2010, Ben wrote:
"S3cr3t - you ever worked for a government dept in a basic office role? Note this is +not+ aimed at teachers / firemen / etc! More power to the doers.

I have - it's really very easy, inefficient and boring. Two comments from mates:

moved to DoE office role from private sector: "it took me a long time to get used to how little work they gave me"

Used to work in MoD in IT - it was boring and we didn't do much but it was great in the respect that whatever you said you needed they would just get it, whatever the cost."

I can assure you it's not like that anymore, certainly not in my corner of the civil service. I've frequently offered anyone the opportunity to come into my office and tell my colleagues they're bunch of lazy freeloaders. I will even have the ambulance on standby, not that I can guarantee the lazy public service ambulance crew will treat the wounded though.

72 and 68 interesting agreed. But still academic deck chair arranging on the Titanic.

Gotta go until later this pm.

I hope more will pick up the thread of economic icebergs such as myself and mrsbloggs.

17. At 4:08pm on 13 Sep 2010, Dempster wrote:
The total amount of debt created up to press is understood to be in the region of:
Public sector debt £927.4 billion
Private sector debt £1456 billion
Total £2,400 billion

Based on an average interest rate of say 5% (after defaults have been taken into account), the total debt at the end of next year would need to be £2,520 billion.

In a debt based monetary system, contraction of debt means less money and more defaults.
If the government and private individuals start reducing their overall respective debt, defaults will rise and we may again face the insolvency of banks.

To keep a debt based monetary system functioning, the total amount debt in a given system must rise. And if it rises past the level at which the debtors can service the debt, the system must collapse.

So for Mr Osborne, he can’t reduce overall government debt, unless there is a corresponding + 5% rise in private debt.

However given the consummate torture that private debtors are currently being subjected to, their appetite for more debt may well be rather limited.

I suspect that over the course of the next few years we will find out whether (as a nation) we have reached the tipping point in a compound debt trap.

.............
Perfectly put. This is the underlying key issue that we should be looking at. Greece and Ireland are showing us the folly of cutting back, it simply wont work and will lead the economy into a death spiral. The only way forward is monetary reform, in order to reduce the debt burden and get out of the vicious circle we are well and truly stuck in.

averagejoe,

so Ireland and Greece who have been over-consuming beyond their means for decades are one year into cutting back and not seeing economic miracles so you brand it a failure already.

This is the whole problem with most people. If you don't get instant results you assume it's all wrong and propose a u-turn.

Their problems weren't created in a year and they won't be solved in a year.

once again I say. Ancient Rome / Colonial America monetary system versus global economy monetary system. Failed big brother socialism versus free market enterprise all of these won't avoid the looming iceberg of no more cheap oil.

Will re-join later this afternoon to see how the deck-chair arranging is going on.

Good to see that inflation has remained well above the BoE's target and yet they still leave interest rates on hold. They are obviously in the ostrich mode and hope that all will be well when they lift their heads out of the sand or have they put them somewhere else?

re no more cheap oil
yes the problem is short termism of government
We need to cut back the public sector non jobs (or at least cut the pay) and use the money to invest in our future, a big part of which is energy self sufficiency, it would also be useful if we reversed our trend of offshoring manufacturing so we could make our own stuff.
We also need to stop the short termist policy of encouraging immigration, we are only a small island we already have too many people for easy self sufficiency. Train our own people so we mostly dont need to bring in skilled people from overseas and certainly dont import the unskilled, we have plenty already.

78. At 09:23am on 14 Sep 2010, Sage_of_Cromerarrh wrote:
‘Once again I say. Ancient Rome / Colonial America monetary system versus global economy monetary system. Failed big brother socialism versus free market enterprise all of these won't avoid the looming iceberg of no more cheap oil.’

I was born in the 1950’s and whilst my parents were not ‘poor’, they couldn’t afford a car. We also didn’t have central heating, we just had open fires (one with a back boiler).

Despite not having a car or central heating, I didn’t miss either of them. But then I guess you don’t miss what you never had.

In any event, on the plus side there weren’t many cars on the roads which meant I had less chance of being knocked off my bike as a young lad.

If the price of oil rockets, some people will drive less, and some not at all. Life won’t be as easy as it is now, but car crime will probably go down.

#15 >>If it is deemed right that higher earners should contribute a higher proportion of their earnings in tax to the nation's purse, then why is it also deemed right that they should contribute a lower proportion of their earnings in National Insurance Contributions (that gets progessively lower the more their earnings increase).

NI was introduced, in the main, to cover the NHS costs. Since each of us have only one body and suffer from, relatively, similiar diseases, it is only fair that everyone should pay roughly proportional to the average of the total needs of the NHS !!

However, lets not get into the fact that the NHS budget is totally skewed by masses of self-inflicted illnesses like binge drinking, obesity and drug abuse, which is costing the NHS dearly !!

81. At 09:57am on 14 Sep 2010, Dempster wrote:
If the price of oil rockets, some people will drive less, and some not at all. Life won’t be as easy as it is now, but car crime will probably go down.
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Nice thought, however I live in NI and oil central heating is the norm, and guess what, the theft of heating oil has gone through the roof. Also petrol theft has risen significantly. They no longer do they try to syphon your tank due to the clever anti theft device in the neck of your filler. No, they simply now drill a hole in you tank. So not only do you loose your petrol you also get a big bill to fix or replace your tank.

If life could be so simple.........

#19 >>
If paying the same proportion is fair then why don't we charge rich people more for their food? We need to get away from the notion that what we have to pay is related to what we earn, only then will we be able to move forward.

By that same token, there should not be any minimum wage since people should be paid for what they can produce. If they produce something that is available cheaper elsewhere, then they should be paid the same as elsewhere !!

Your argument is theoretical and will not work in reality. The luxuary of theoretical arguments are over and it's time to face reality, or else, sooner or later, we'll be forced to face it; possibly Zimbabwe style !!

Sage,

Why are you so fixated upon the PRICE of oil? I could understand your viewpoint a little more if you were concentrating upon the reserves of oil. The mere price of oil is skewed by the political/economic policies of the producers and consumers, the nature of the commodity market for oil and the practicability/availability of alternatives. Now all of these are moveable feasts and have little to do with the oil itself.

#21 By the early 70s, the top rate tax was 97.5% and if you saved up, you were charged an extra 15% on top of that for the privilege, making it 112.5% of your income. Inflation was rising to 15% !! The Beatles, the Rolling Stones and anyone else who could make it, suddenly became Americans !! The Brain Drain fed the American science and technological boom of the 70s and 80s !! This was Labour's idea of a "fair world" and it lost a whole generation of "brains" for Britain. It finally ended when Britain went bust and Healey had to shamefully go begging for an IMF loan !! Not much different from any other Third World country, really. Gigantic social engineering experiments based on ill-concieved concepts and the only ones who suffer are the citizens !!

I was doing bean-counting then, so I do know a bit about what happened !!

83. At 10:16am on 14 Sep 2010, Chris London wrote:
'I live in NI and oil central heating is the norm, and guess what, the theft of heating oil has gone through the roof. Also petrol theft has risen significantly. They no longer do they try to syphon your tank due to the clever anti theft device in the neck of your filler. No, they simply now drill a hole in you tank. So not only do you loose your petrol you also get a big bill to fix or replace your tank'.

I know where you're coming from, my friends daughter has just suffered the same fate with her car.

#23 It's called journalistic license or scare-mongering; sometimes referred to as "spin" !! How else will they catch the attention of a jaded and disinterested audience ?? Those who are truly interested will immediately discount such ideas of measurement.

FYI, one method that has *NEVER EVER* been used is - How much is that equivalent to in the Journalist's own pay ?? That would be a more interesting measure and we can know how much we are paying them to tell us all this "interesting" information !!

#71 mrsbloggs,

"You could be retired on an income of 20k and pay no national insurance, likewise any income level. In addition, you'd get a range of 'entitlements'. A retired person over the age of 65 would be much better off than their young counterpart starting out in life.

Is that fair or equitable? "

The simple answer to that question is yes. The retired person has been paying tax throughout their working life. The vast majority of them paid the amount of tax demanded of them (both diect an indirect) and provided the best that they could (and maybe more) for their children - who then became in your words "their younger counterpart starting out in life".

If you wish to equate equity with money then it could be said that that in their retirement the older person was only recouping the expenditure from net income that had to be expended on the future workers.

Two further points come to mind:

(a) Is £20K retirement pension (from all sources) truly typical? I somehow doubt it.

(b) Where would the "younger counterparts" find work if there was not a retirement exit from the workforce?

Why are politicians so afriad to talk about tax increases?

What would we all rather, pay a bit more in tax or lose our jobs? It's seems politicians haven't grasped that the world has changed and anything now goes. We should increase taxes and reduce the risk of a double dip that will come from Osborne's savage cutting. Let's avoid a desperate period of decline for this country by all of us who can afford more to pay more.

So the question is simple, pay a bit more in tax or have no job. I know what I'd chose.

I'm also sick and tired of my friends who have their own business bragging about how little tax (None) they pay. Porsche and Bentley might suffer some loss of sales though ;-)

Thanks for your views on the planned spending cuts Stephanie. Do you have any thoughts on today's disappointing inflation numbers? This is a problem that keeps returning to haunt the UK.

#86, ishkandar,

Nice rant but lacks more than a little of your fabled impartial stance :)

I don't argue with your %ages. However, go back and look at the true facts regarding the "brain drain". You will find that the numbers were not that significant and that large numbers those who did leave were back in the UK within 10 years.

85. At 10:19am on 14 Sep 2010, foredeckdave wrote:
Sage,
Why are you so fixated upon the PRICE of oil?
-------------------------------------------------------------------------

Oil has a direct impact on every part of our lives unless you are living the good life and even then it still has a bearing.....
You buy any good - well they have to be transported.....
You use plastic .....
You use electricity .....
Etc Etc

A major supermarket recently went on the record saying that oil made up over 7% of the average cost of an item. That is a massive proportion if you think about how much profit and fix and indirect overheads there are in the price of an item not to mention tax.

Oil I am afraid has a major impact on all our lives and hence it's cost is significantly important.

#36 >>We would have shed loads of billionaires in Britain spending and employing in our economy. But the socialists (wealth envy) would never wear it.

An interesting comment. To add to it, the numbers of millionaires and billionaires in China, a *Communist* country, are on the rise, whilst the numbers in Britain, a purportedly Democratic, Capitalist country, are falling; most having emigrated along with their wealth !! So, as the tax rates get ever higher, the tax take gets ever smaller !!

This happened during the 70s Labour years and the phrase "Lessons have been learnt" is sounding exceedingly hollow !!

#46 >>If I am walking down the road and a much larger person come along, I do not expect him to use his greater physical abilities to take money from me. In a civilised, democratic society, greater intellectual ability should not be used to take money from those with less intellectual ability. That is where our present system is failing.

Extending your argument still further, since most of Europe (including Britain) are using an unfair share of the world's resources compared to the millions/billions of starving Africans, then, surely, it's high time for the Europeans to scale back their demands and "fighting for what they want" and give up a fair share to the Africans !!

#47 >>It is our present version of Capitalists that are wealth envious.

In our present form of Socialism, there's the politics of envy. They want to tear down those richer than they are but desperately cling on to their wealth and possessions in face of those poorer than they are !!

I'd say, on average, 70% of the world's population are poorer than the average Brit !! So how about sharing some of what you have with them ?? Live with less and let the others have a chance at getting more !! Stop being envious of millionaires and billionaires and think of the poor African farmer starving in the midst of a drought !!

Or is it to be "*ME* first and *ME* always" every time !!

#52 >>In a country with a static GDP and a debt based monetary system, is the collapsing debt ration the inverse of the average debt interest rate in years?

Take a look at the Japanese. They seem to be managing alright for the last 20+ years !! Perhaps, it's because their population save more than they spend despite exceptionally low interest rates (it was 0(ZERO)% at one point).

#56 >>Actually, the tricky thing is finding the savings AND getting re-elected at the next election - the government is full of politicians after all!

And politicians will say anything to get elected. How many have made good their electoral promises ?? Our "prudent" ex-Prime Minister and former Chancellor turned out to be not so prudent after all. Yet more dirt is still re-appearing from under the carpet !!

97. At 11:42am on 14 Sep 2010, ishkandar wrote:
"In our present form of Socialism, there's the politics of envy. They want to tear down those richer than they are but desperately cling on to their wealth and possessions in face of those poorer than they are !!
So how about sharing some of what you have with them .... think of the poor African farmer starving in the midst of a drought !!..
Or is it to be "*ME* first and *ME* always" every time !!"

ishkandar I just happened to read an article in an English newspaper that rhymes with Daily Rail. Here is an extract:-

'Senior executives at the Commonwealth Development Corporation (CDC) control a pot of public money which they invest in the world’s poorer countries. The laudable idea is that they will help these nations to help themselves.

But the CDC has spiralled out of control, unrestrained by weak Labour ministers and apathetic officials. Its chief executive, Richard Laing, recently took home nearly £1million for a single year’s work, and his senior executives enjoy average pay of £435,000 in a good year.

Yet they still couldn’t resist putting on their expenses £700 dinners at Michelin-starred restaurants, costly stays in some of the world’s finest hotels....'

Needless to say it goes on further. And many of our Bloggers on this site say "Why cut spending?" - the words hypocrisy and egregious come to mind!