Friday, 30 October 2015

Tax credits and the austerity fiction

There is a widespread belief that the Tory Scum are cutting spending in order to kick the starving masses in the groin. But when you look at what is actually happening, you get a different picture.

Look at the 2015 figures for the UK. The government is spending more than it receives. The extent of this overspend, is 4.1% of gdp, and this is an overspend per year. And when you compare the UK with other western countries, you'll see that only Japan, Spain and the USA are overspending more.

This overspend is met by our government's borrowing, and the amount that the UK owes is now 90% of gdp. Again, the total debt that we've racked up over the years, is greater than any other country except about a dozen (and that's including cases like Zimbabwe). Greece, for example, which is generally considered to be in a bad situation, owes 158% of gdp.

There's no cuts, There's no austerity. The "cuts" were reductions in the planned growth of public spending. We're still running a deficit, which means that the already large national debt is still growing. But is this a bad thing? Well that depends, but you can't run a big deficit for ever.

An individual, a company and a country might need to borrow. The interest rate that they'll get, depends heavily on how confident the lender is, that they'll get repaid. For example, in 2011, private lenders who had loaned money to Greece, were given a 50% "haircut". That's financial jargon for "You loaned £1000, but you're only getting back £500". Lenders accept a haircut when they're persuaded that the alternative is worse - a default.

A country that defaults, or who cuts your hair, is going to be seen as a much greater risk in future. What sane person would lend money to a defaulter, or even a haircutter? But take that one step surther - if you're lending money to someone whose debts are already large, that's riskier, so you want a higher interest rate.

And that's already happened - UK bonds used to be AAA rated,  in 2013, that was cut to AA1.  Greece is CCC-. The larger your debt, compared to your income, the more reluctant people are to lend to you, and when that gets really bad, you get Greece. There comes a point where no-one is going to lend to you, and suddenly your deficit is zero, whether you like it or not. And "suddenly" means "very painfully", with lots of people unable to understand why the money tree suddenly stopped fruiting, and riots in the streets.

And that's what the row about tax credits is all about. The government is trying to reduce the deficit, and to do that you have to tax more (boo, boo) or spend less (boo, boo) and if you do either of those, you have to do it either without anyone noticing (and beleive me, there's lots of ways a government can do that) or else by gradually changing the tax and spend system in such a way that people scarcely notice the increase in pain.

It looks like Osborne cocked it up, and some people would have had a sudden increase in pain. Although, to be fair to Osborne (and the hordes of mandarins at the Treasury) it's really difficult to do a change to tax/spend without at least some people suddenly feeling a cold wind.

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