Wednesday 7 December 2011

ITS THE ECONOMY STUPID (part two) THE MICAWBER PRINCIPLE

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 wonga.com 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

IT'S NOT ROCKET SCIENCE WE CANNOT GO ON SPENDING AND BORROWING UNLESS WE ARE EARNING ! AND WITH RECORD NUMBERS ON THE DOLE AND INCOME TAX FALLING THE CURRENT GOVERNMENT ARE MAKING MATTERS WORSE NOT BETTER

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.

Monday 5 December 2011

"IT'S THE ECONOMY STUPID"

Why are we never really told in language that we can all understand what is really happening with the worlds economy?

Is it simply a case of treating us like mushrooms, constantly left in the dark and fed on manure in the hope that we will not ask too many awkward questions?

Recently I have been asked by a number of people (usually over a drink) to explain to them what is really happening to us all, and so I decided to commit it to print for others to take in and question, I would appreciate it your views.

THE STATE OF THE UK ECONOMY IN PLAIN ENGLISH (PART 1)

Background:

First of all to understand the mess we are all in now, and how bad things really are, we need to understand how we got into the mess, and also who was responsible for us getting us in the mess in the first place. Basically during the 1990's, and into the early 2000's Banks across the Western world particularly in the USA but also in part in Britain started to relax the rules on lending money to house buyers who were encouraged to take out bigger and bigger loans. In more responsible times people looking to buy homes were usually advised to borrow no more than three and a half times their total single/joint annual income, but all of a sudden banks were giving mortgages out like confetti, in the USA few checks were taken on whether or not people were able to afford to pay back the loans and even benefit (Welfare) claimants were being given mortgages despite their income being far lower than the repayments!

The Banks then sold that debt (they would package 100's of mortgage loans into one bigger debt) onto bigger financial institutions to try to reduce the risk to their own bank. And then the bubble burst as the financial institutions who now were left holding the risk suddenly found out that the people living in the homes couldn't afford to pay back the mortgages and as a result repossessions rocketed. As a consequence some of the Banks and the super banks went bust and no one had any money to lend out to anyone. This of course had a massive impact on other businesses who now couldn't borrow from the banks to either expand or even cover short term cash flow problems, so the economy started to slow down, people were laid off, who then couldn't pay the mortgage and the whole cycle went around and around. Meanwhile the value of peoples properties were also falling meaning people owed far more than they could ever sell their homes for, but even if they could afford to sell them potential purchasers also couldn't anymore get a loan from the banks. During the boom banks would lend couples 100% of the cost of the house and even more on top in some cases, but now the banks wanted deposits and restricted total loans down to 70% to 90%. First time buyers couldn't even afford the deposits and the housing market stalled.

The crazy thing here though thing is that the big financial institutions were so tied into the world economy, that they knew that they could take such risks with other peoples money and homes in the faith that the governments will come to the rescue with billions and billions of pounds in order to avoid financial meltdown within the stock markets. These people are still flying around in their private jets  and driving Bentley's whilst many who now live on the edge through in some cases bad decisions but others through  necessity whilst the banks continue their casino style gambling on the worlds banking roulette table. Traders even glout on the TV as to how wonderful the reccesion is and how every new collapse brings them more opportunities to make money.

The Labour Government:

Despite both the Tory and Lib Dem parties repeating over and over again like a mantra since the election in 2010 that it is all the Labour Party's fault, The Labour Government at the time  were not responsible for the meltdown, the reasons for that are outlined above however they cannot in any way be seen as just innocent bystanders in this mess.

They failed to implement any guidance to or legislation on banks restricting the amount of lending to avoid bad debts. They also let the finance institutions act exactly how they wanted without any meaningful intervention. The former Chancellor, Gordon Brown and to be Prime Minister at the time took his eye off of the ball and stood aside as the sub prime mortgage debts were being resold as good business.

Having given the Bank of England almost total independence he had no room to manoeuvre even if he wanted to, that coupled with a desire to keep his new job meant the country just drifted into more borrowing and less action.

The government also had left social housing projects solely within the private sector which would never fill the demand of such housing. A boost in public sector house building at the time in my mind might just have saved the day, but the lack of supply fuelled house price inflation to ridiculous levels.

Joe Public:

The other player in this sorry affair was the public at large who had become obsessive about house ownership, home improvement, buying things we didn't need and whacking everything on the plastic, as a result personal debt spiralled.

The feel good factor from the pre 1998 prosperity made a lot of people completely forget the self restraint of managing their debts sensibly. A must have, will have it now society, not even embarrassed by taking on extra debt they cannot afford. Now we are all paying the price. Housing costs had also rocketed and now took up more and more of the monthly salary as a % of income. We were all trapped in the credit card debt zone and unprotected against the ill wind that was blowing.

In part two (to follow very soon) we take a look at the Country's income and expenditure over recent years and try to make sense of the economy from a  Mr Micawber (Charles Dickens) point of view

 "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

in order to get our head around just what the country is earning, what we are spending and how we close the gap.

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Thank you for visiting "tonyclarkegreenparty" The views expressed here are mine and mine alone. They are made by me personally in my own capacity as free citizen and not as representative of any outside body or council that I may serve on or be employed by. However if anyone is offended by any of these comments or feels that they should be corrected then please contact me in the first instance at tony.clarke@email.com and I will do my best to consider your comments and correct any errors.

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