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A moment on the lips, a lifetime on the fiscal deficit
Much has been made recently of cutting the budget deficit and the need to get the countries finances back on an even keel. The coalition has announced that they are to cut £6 billion from the deficit immediately, which sounds impressive. Until you understand the figures.
The deficit is currently £167 Billion pounds per year. It is important to remember that this is just the deficit, i.e. how much more we are spending than we can raise in taxes every year. Cutting £6 billion from the deficit means that we will only overspend by £161 Billion next year and every year thereafter. Comforting isn’t it.
The actual debt that we are in is £914 billion, or £914,856,469,391 if you want the scary version. It is evident that cutting £6 billion here or there is like bailing out the Titanic with an eggcup. Even these modest cuts however have generated much howling and anguish amongst those who fear the effects; to the point where we know that cutting a further £908 Billion just isn’t going to happen without rioting on the streets. But there is another way.
Lets draw an analogy and imagine that you have also been gorging yourselves on the good things in life over the last ten years without much thought of the future and as a result have put on a few pounds. Actually, not just a few pounds but you are carrying more weight than anyone has ever carried since the 2nd World War. In fact Channel Five have been in touch and are considering doing a documentary.
Naturally, following a program of sensible exercise and healthy diet would be the sensible, if boring, thing to do. The downside is that this will take a very long time and cause upset and heartache to the local take away outlets that have become dependent on your revenue.
Therefore you hit upon an idea that keeps everybody happy and makes you feel slimmer. Just wear bigger pants. Admittedly it’s not a recognised slimming technique but it works for the countries finances.
Inflation is the fiscal equivalent of wearing bigger pants. The higher inflation is allowed to go, the smaller our debts appear. Given that by the inflation method you can reduce the debt without having to do those nasty cuts that are so unpopular, you can see why the idea might be appealing to the politicians when compared to rioting kebab shop owners.
The problem is that allowing inflation to go up has numerous side effects, none of which are very pleasant for the jobs market or manufacturers who export. Those who remember the hyper inflation of the seventies will tell you that when you went to the pub you bought always got the first round as the last round could be twice the price by the end of the night.
And yet inflation has gone up a fair bit recently, in fact last month it was between 3.7% and 4.5% depending on which figures you believe. Consequently, Mr Osbourne won’t be too upset because it makes the debt a little smaller. Not much, but in dietary terms it’s enough to allow you to sunbathe on the beach without Greenpeace trying to roll you back in the water.
You may be wondering however, why not just go along with this inflation idea if it means that we doesn’t have to pay for it through cuts in government spending and increased taxes? After all the government debt is the equivalent to £31,623 for every person in employment.
Well, you do pay for it actually. Lets just say you have some money in the bank on deposit and you are very pleased with yourself because you found a rate of 3% on a price comparison website. Just before you email Martin Lewis to tell him how clever you are, lets just do some maths.
Firstly, take off 20% tax income tax. That reduces your 3% to 2.4% net return. Then deduct inflation over the year of 4.1%, leaves you with errrm….. a 1.7% loss. So for every £1,000 you have invested you are losing (paying) £17 every year. Look on the bright side though it’s a fixed rate so it’s guaranteed. Oh…..that’s not a point in its favour is it.
So you see that whichever way you look at it, we need to reduce the debt and it’s going to hurt a little bit. There is no silver bullet, but perhaps when you have eaten yourself to such a size that washing yourself requires a rag on a stick; maybe wearing slightly bigger pants is no bad thing, if enjoyed with lots of salad and a bit of jogging. After all, worse things happen at sea, just ask the guy with the eggcup.
Tagged as inflation, budget deficit, tax, overspending
