Wednesday, 7 December 2011


When I arrived at Kings Bench Prison Mr. Micawber was waiting for me within the gate, and we went up to his room (top story but one), and he cried very much. He solemnly conjured me, I remember, to take warning by his fate; and to observe the other piece of advice he had given, "Copperfield" said Mr. Micawber,

"You will remember, annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and — and in short you are for ever floored. As I am!" 

After which he borrowed a shilling of me for porter, gave me a written order on Mrs. Micawber for the amount, and put away his pocket-handkerchief, and cheered up.

Mr Micawber's good advice to David Copperfield is as sound a financial principle as you will ever find, you see economics is not difficult at all, it has always been about ensuring you never spend more than you earn, or if you do them only borrow what you can afford to pay back from within your earnings. And so it was that the last Labour government on a pretty good record of previous prudence found itself logging on to the equivalent of a multi national to ensure it could pay its way after spending a fortune bailing out the banks in 2008. Below we take the Micawber principle a step further and align it to the UK economy, the graphs alone make interesting viewing and if you want to look in more detail just click them and they will enlarge, just like the countrys debt!

Like any household, UK PLC has an annual income and an annual expenditure budget, it is only the figures that get bigger, so what does (or did!) the country earn in a year? What does it spend? And where does the money come from and go to? If we look at the years running from 2002 up to the 2008 Banking crisis and we will see that the total income and expenditure of the UK government was pretty much in balance Our income from 2002 (roughly £430bn) to 2007 (£544bn) was rising steadily this of course is mostly made up of tax income together with money from any sales of government property or stock. Our planned expenditure each year was planned on the expected income the same as you and me would set up our direct debits and plans based on our expected monthly pay checks. Sometimes expenditure was slightly ahead of income and sometimes the other way around but it was manageable. The chart left shows income and expenditure per capita (which means per person) in the UK as you can see the amount they earned from each of us was rising year on year and in 2007 we were paying out about £8300 each to the government and recieving about £8,800 back in service, but then in 2008 it all went Pete Tong

In fact the data is remarkable: from 2002 to 2008 the difference between income and expenditure over the whole period was just £6bn – or 0.2% of total income for the six year period. In three years prior to 2002 we even had a surplus and was able to pay back on our debt bill. During that period the total we owed in long term borrowing (the equivalent of the household mortgage or outstanding loans and credit) hardly moved and stayed around the £500bn mark this was the equivalent of just one years income, in other words its like the average couple both working and jointly earning £40,000 a year only owing £40,000 on their mortgage and credit cards, it was manageable.

As a result here was little or no borrowing problem. Nor despite the politicians claims was there excessive spending – it was funded on a "living within your means" Micawber principle. Until 2008 that is when it is not spending that is excessive, but the fact that income falls off a cliff and we spend a fortune on bailing out the banks, and that is where our problems started. Government Income though should not be confused with GDP (Gross Domestic Profit) GDP refers to the total market value of all goods and services produced by a country each year, and is usually about 3 times what the government actually earns. I prefer to stick to the real income but GDP is important in economics as borrowing is always measured by the banks as a % of a country's GDP to see if they can afford to borrow any more, just after the second world war when Britain borrowed to rebuild our borrowing as a % of our GDP was a massive 240% of our GDP (2 and a half times what we all earned) in fact in the early to mid1800's it was even higher (more wars to fund) but from the 1970's onward it was at almost record lows before the crash in 2008 the % was around the 40% mark but now it is rising ever closer to the 100% levels last seen in the early 1960's.

So lets look at the nations debt and borrowing year on year from 2008. In 2008 we owed £525bn in 2009 we borrowed a further £91bn and now owed £612bn in total, in 2010 when the coalition came to power we borrowed a further £143bn and owed £759bn and this year 2011 we are looking to borrow a further £150bn to bring the total to £909bn in fact because the new government has stifled growth and the benefit bill has increased to pay to keep people on the dole the treasury estimate that the debt will rise to £1046bn in 2012 £1164bn in 2013, £1251bn in 2014 and reach a whopping £1314bn in 2015. The Tory/Lib Dem coalition have now accepted that they will have to borrow more than even the last Labour Government had planned to borrow (an extra £40bn) during the same period.

To explode another myth over which government (the last or this one) is spending more in government spending in 2009 was £621bn in 2010 it was £660bn this year 2011 it is planned to be £683bn and next year 2012 we are planning to spend £760bn


Lets look at what we have been spending and plan to spend on the welfare state in order to keep public sector workers on the dole. In 2009 the welfare budget was £94.47bn in election year 2010 it was £106.69bn this year it is £109.48bn and next year 2012 £110bn. That's £16bn a year more than the last government was spending on those who are inactive. In addition every worker we put on the dole reduces the income tax income and shrinks the high street spend. The total income tax received by the treasury has shrunk from £152bn in 2009 to just £140bn now, another £12bn deficit to be paid for, meaning that so far the bill for Cameron and Clegg's cuts programme just on increased Welfare and lost income tax revenue is £28bn a year. Pension payments which are also affected by the lack of donations to the NI budget are up a further £20bn a year pushing the deficit ever higher and growth is non existent and we are paying out more in benefits and borrowing more and more each year to fill the gap left by reduced income tax receipts and higher debt charges.

So going by the rules of the Micawber principle that we are earning less than we are spending of course there is a need to cut expenditure, but should we be reducing our income at the same time by working less? The only way to close the gap is to increase not decrease our income and encourage growth. Why are we sacking public workers who earn little and provide vital services when it pays us to keep them working and spending? Why pay out to a household £30,000 a year in unemployment and housing benefit when you can put the same household to work doing something useful for the same money and increase the income tax income of the country and encourage spending in the economy? as the chart above shows we are as a country spend ever more on keeping people inactive and as a result can not afford the extra cost of education and healthcare without more income tax coming in and less welfare payments having to be paid out.

As well as these short briefings being delivered in plain English I also believe the truth is always better served in small bite size chunks, and thats enough figures for one day so here ends part two of our short series. In part 3 we look at how other countries are faring during the world economic crisis, but as you can see from this chart on the left it's not a pretty picture, for anyone and we will also look what the euro has to do with us and whether or not Britain thanks to David Cameron's weak negotiation skills can really stand alone during what is a deepening worldwide recession.

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