Dateline Newcastle upon Tyne - Monday 25th May, 2020 18:00
IT'S NOT SO AUSTERE AS YOU THINK
by Tim Jones, 13th June, 2017
Those clever chaps who should know tell us that running the country's finances is not like what you and I experience in our household affairs. I'm not too sure, though. Maybe those posh chaps in striped suits just want to maintain the mystique.
Consider some of the terms bandied about to put us off the scent. Gross Domestic Product. That sounds pretty household, doesn't it? What they mean here is a number representing the best guess at the value of all the goods and services produced by the country during a certain period.
That's simple for widget makers. They sell 10,000 widgets at 10p each, making £1,000. Taking away the cost of materials and production leaves us with £85. So you can calculate the wealth created.
Let's pop to the shops to buy a widget. Tescoloid's buy in widgets at 10p but sell them to you for 15p, so making 5p in the bargain. Let's say they sell all 10,000 so making £500 overall. But Tescoloid's have wages and other costs, so the real gain is only £25. Here again, it's simple arithmetic.
The same goes for services. Your haircut costs you a fiver, but the hairdresser only spends £4.50 doing it, so makes a gain of 50p.
Add all these increased values together to obtain the Gross Domestic Product.
Now, how can this be, you might wonder, if the only people able to purchase these goods and services are those who have money to do so? We saw that the wages are only a small proportion of the selling price, so there shouldn't be enough money to buy things that in turn shouldn't return enough wages to continue the cycle. In this model the widget maker boss, Tescoloid shareholders, and the hairdresser become enriched, while the rest of us become progressively poorer. Is this starting to sound familiar?
Enter the government, with its tax take. Almost all human activity is taxed to some extent, with the cash collected being largely churned back to provide some sort of subsidy. Take the hospitals as an example. We didn't include them in the calculations for GDP as we can't put a value on the service provided. There is a value, it just can't be calculated in numbers. We can know how much it costs, but we can't know the value of the benefit to all those people using the system.
Say you go in for a hernia operation. You risk infection followed by death without surgery, but the skill of the medics means a full recovery and an active life afterwards. How much is that worth? Or think of the poor patient with an advanced brain tumour. There is no cure, the only thing is to administer care and morphine until the end. We know that it costs something, but how much is it worth to the now dead patient?
Clever accountants, often with an agenda, will come to some figure based on the charges made in other developed countries (America, haha!), but that is not comparing like items.
Other subsidies derived from the tax take are the armed forces, pensions, military manufacture, and some national infrastructure like roads.
Another fond term those striped pants use is Deficit. What they mean by this is simple. It's a figure you get by subtracting what you spend from what you earn. In the case of the government, it is expenditure against tax take. So, that's a bit like your overdraft, then. You can avoid some large overdraft fees and angry bank mangers by doing some spend on the plastic; running up some credit card debt. That's exactly what the government does, although they use The Bank of England and any other country's bank willing to lend instead of Barclaycard or Capital One.
There are automatic stabilisers in the economy so that the deficit rises and falls as the economy contracts and expands. When commercial activity increases tax revenues rise but spending on unemployment benefits falls. This up and down cycle will happen even if government policy remains untouched.
The confuddlers at the top tell us the "simplified" figure. Deficit as a proportion of GDP. That's like your speedometer giving you miles per hour where miles keep changing in length, and some hours last longer than others.
Now we come to some of the more serious buzzwords flying about. Recession, for example. What this means is that the business cycle (see GDP above) becomes smaller and slower. We can't afford as many widgets as before so fewer widgets are sold. The factory slows down. Tescoloid's makes its widget department smaller, people lose their jobs. Some widget firms go bankrupt, some families are on the breadline.
Where has all that money gone? You may very well ask.
Remember the deficit? You and I rely on borrowing to shore up the peaks and troughs, but if the funsters at Finance Express or Grab-a-Loan cut off the supply or even want their money back, you have less to spend, you buy less, the shops close, and the factories go out of business. That's a recession.
Now we come to the most made up nonsense yet, Austerity. The dictionary says, "A situation in which there is not much money and it is spent only on things that are necessary." A government that tries reducing its deficit by increasing taxes, say putting up VAT to 20%, is heading for trouble. More tax, less spend on goods and services, therefore less economic churn, hence less tax take. Oh, dear. That's not going to work.
Let's spend less, then, say the parliamentarians. Remember we saw how when taxes were spent on things it acts like a subsidy to the economy. Denying that spend is just like removing more cash from the system. Spend less on the Army and Navy, starve the NHS of funds, threaten to swipe old people's hard earned pensions, forget that much needed by-pass. So, that's more people out of work - and let's not fool ourselves, zero-hours contracts obscure the real underemployment around - less stuff being made and done, so less chance of bridging that deficit gap. Our present government, repeating the austerity mantra, has an ideological preference for lower taxes and a smaller state.
Those clever economists, befuddling us all with their easy answers that defy understanding, are still arguing about the causes of the 1930's recession, so fat chance they have solutions for 2017.
OK so let's try another wheeze. Let's make more money. Simple. More to go around, everyone's happy. Dear Bank of England, We need another couple of squillions of fivers printed this week. No, make that twenties, fivers are too pleb. Yours, Prime Minister.
That works for a millisecond or so, until everyone cottons on to the fact that there is more about so the worth goes down. No luck there, then. Oh, dear. Once our foreign friends find out the wolves waken at the door.
The government has now run out of Austerity options. It has yet to admit that the policy has made matters worse, but at least it is beginning to think that strategic spending will stimulate activity with the result that we will all become more prosperous.