Osborne Problem in Two Sentences

From today's Guardian:

UK government monthly borrowing rises more than expected to £8.6bn.

Fall in corporation tax receipts hits George Osborne's chances of meeting his deficit reduction targets for this year.

Or more succinctly, as the  IMF has been saying since this time last year, the government's approach to managing the economy is causing tax revenues to shrink exacerbating the government's problem.

You have no idea how much it pains me to agree with the IMF. But there is it. However the article also contains this:

A Treasury spokesman said: "The economy is healing, but it still faces many challenges..."

Now the first part of this statement is just bullshit. The economy is not healing, it is actively haemorrhaging still. Which is why government borrowing is rising still.

Remember the falling unemployment figures? Puzzling. But here we see the truth - business might be creating a lot of part-time jobs, but it is paying less tax. This either means that everyone is doing better at exploiting tax loopholes, or that they are making less profit. Only the government can do anything about the former, and despite the fact that they are long on rhetoric on this subject, to date there is not even a substantive proposal for tax reform, despite all the other reforms pursued by this so-called "Conservative" government.

One of the chief reasons revenues continue to fall is that demand is low, and one of the chief reasons demand is low is that debt repayment is soaking up a huge proportion of GDP. When debt is 492% of GDP (according to Robert Peston) what are the payments on it likely to be - I've asked many economists to offer a guess and they uniformly ignore me. Perhaps the answer doesn't bear thinking about?

A conservative is someone who seeks to preserve the status quo. The so called Conservative element of the coalition government is strongly reformists and has been shaking up the establishment from top to bottom to no great purpose. The Conservatives have morphed into the NeoLiberal Party.

Bank of England no Longer Predicting Recovery.

The Bank of England's Inflation Report for Nov 2011 is out today. The outlook is fairly pessimistic.

"The UK economy has barely grown over the past two years, as it has laboured against the consequences of the financial crisis and its impact on global demand, a sharp squeeze in domestic spending power and a necessary fiscal consolidation. The period of weak demand has been accompanied by stagnant productivity, raising questions about the extent to which the supply capacity of the economy has expanded. Increases in energy and other import prices and in VAT have meant that CPI inflation has been well above its 2% target for much of this period."

The chart above shows that BoE's GDP projections are on the low side, and that for the last 18 months at least the real GDP measured by the ONS has been on the low side of their projections. The model produces a bounce back, probably because this is programmed into the model. Throughout the 20th century the UK bounced back to historical trends of growth after recessions. A quick look at our GDP curve (below) shows that this recession is different. We aren't going to bounce back this time. This time it's different. (see also Past, Present and Future of GDP Growth)

Quarterly GDP 1955-2011

We don't have to look far for the reason it's different this time. From 1990 - 2010 UK private sector debt increased by 700%, as virtually all limits and oversight were withdrawn from the finance sector. Massive indebtedness means were busy paying off debt instead of spending or investing.

Any sensible government would be looking for ways to decrease the debt burden - a debt jubilee or debt relief program - which would be the best stimulus for growth, because it would stimulate demand by freeing up disposable income. Indirectly it would help the government balance the budget by boosting their choking revenue stream.

However "sensible government" appears to be an oxymoron. The Tories still seem fixated on cuts as the way forward despite mounting evidence of the deleterious effects. And despite the fact that Vince Cable identified the problem with consumer credit in 2006 and predicted trouble on that basis. He didn't quite foresee the crash in the way that other's did, but he did ring alarm bells. However Mr Cable appears to have forgotten that he ever knew about the problems of high debt levels now that he is Business Secretary and in a position to do something about it.

On the plus side unemployment came down this week, though it seems many jobs are being converted into part-time work. And there is the hidden effect of the government shuffling people around in work schemes. Claims for benefits went up which is probably a truer reflection of the state of employment.

Privatisation and the Deficit

A few weeks back the IMF published from information showing that the UK deficit was primarily caused by a reduction in revenue, rather than increase in spending. This is partly why they are now also saying that austerity won't help. Cutting spending won't deal with the problem of reduced revenue in the long term, and will in fact have a negative impact on revenue because of the consequent shrinking of the economy. We know this, and we know that the government is in denial about it. And taking £35 billion from the BoE as a fig leaf is not going to convince anyone. The Tories are naked and refusing to admit it.

Over the weekend the Observer, more usually a light-weight, published a story showing that three of the largest water companies in the UK have parent companies in Jersey, and pay no, or next to no, tax in the UK despite making enormous profits - and note profits not simply turnover:

Water companies pay little or no tax on huge profits

So these companies that benefited so hugely from the free market experiment repay us by sucking money out of the UK economy. Money that all used to go to the government.

We've also been hearing about how other large companies such as Amazon, Google, and Starbucks make fools of the UK people and its government by avoiding paying tax here, again despite making healthy profits.

Should we be surprised that large corporation have no sense of social responsibility? Well, no. Let's not be naive, these companies are set up to transfer wealth to the wealthy and no other reason. The service they provide has become incidental. The naivety has been on the part of successive governments. The ideology of the free market religion is that by allowing companies free reign (and all the while piling more and more regulations on individuals) that we all benefit. There never was evidence to support this ideology, its just something that some rather brilliant, but completely unrealistic, theorists came up with and won Nobel Prizes for. It never related to the real world, and still does not.

We now have 40 years worth of evidence now. And what the evidence shows is that free markets lead to long term economic instability - crisis after crisis across the planet; and to increasing economic inequality, which also leads to social unrest. Regarding inequality the free market religion facilitates the greed of the already wealthy and allows them to circumvent regulations requiring them to be good citizens. When people behave that way they are labelled anti-social and given punishments. But the free market religion does not see the dark side of business, it only sees the light.

It is true that privatisation has often produced benefits in terms of service. It's not all bad. But the cost has yet to be really counted. Indeed I think we are beginning to see the true cost in articles such as the one in the Observer. How long can we afford to pander to these companies that have no loyalty to the community which feeds them. It's like having a pit-bull terrier as a pet. It's only a matter of time before it turns on us or our family and decides to bite us.

I think we also have a problem with the middle classes in the UK. They are too comfortable, and too willing to put up with the squeeze. They are happy if they can maintain their standard of living, or a semblance of it. But they aren't paying attention to the consequences of having their heads in the sand. A happy middle class existence is dependent on social cohesion, and long term stability. We're in danger of losing both of these. 

Governments need to stop being so naive about the intentions of business. If the aim of government is stability and prosperity for all, which is what it should be, then some kind of decisive reform is necessary. If a business is operating at a considerable profit in the UK and paying no tax on it's income then something has gone disastrously wrong. If we're going to tax wages and profit, and profit is adept at avoiding paying any tax, then all of the burden falls on wages. Such a situation cannot be allowed to continue. If that company is the healthy beneficiary of a government sponsored monopoly like a water company, then the fact that they don't pay any tax is an indictment of both the company and the government. Making a profit and paying no tax is immoral, even if the law is so stupid as to allow it.

The dark side of privatisation then is the huge negative impact that it's had on government revenue. That government is in denial about the real impact of small government and privatisation is not helpful. Just as the UK was in denial about Jimmy Saville and his child abuse. Companies like Anglian Water are abusing this country. We can't just stand by and watch it happen. Or maybe we can?

For a government staking its reputation on balancing the budget, the obsession with spending at the expense of revenue, the abject failure to deal with rich cheats while continually bashing the poor, leaves it looking more naive than average, more clumsy and blindly ideologically driven than any government since the 1970s. And that is saying something.

Occupy Wall St's Rolling Jubilee!

This is such a brilliant idea. Occupy Wall St's Jubilee idea is to use donated funds to buy up poorly performing debts - which can be done for pennies in the dollar. Then they just forgive the debt. They call it a Rolling Jubilee (http://rollingjubilee.org/).

In America Banks sell debts which are bought up by debt collectors who then extort money from the debtor. A little bit of money goes a long way. With $50k they can buy $1 million worth of debt and forgive it. 

As well as the website there is a YouTube video:

One of the organisers, David Rees, also has his own blog How to Sharpen Pencils, and he describes how in the test run they used $500 to buy up $14,000 worth of debt, and just forgave it. There is a fund-raising event on 15 Nov which will be streamed on rollingjubilee.org.

The industrialised world is heavily over-burdened with debt. It is sucking the life out of our economies. We desperately need a debt forgiveness program - a Modern Debt Jubilee. I have been advocating Steve Keen's version of this, but it assumes that the government will face up to the private debt problem. The fact is that if we wait for the UK government to do something about private debt we'll probably die waiting. The government is deep in denial about private debt and have no policy to deal with it. So we need to help ourselves and this Rolling Jubilee idea is an excellent approach to it.

If you are American I urge you to donate money to this project. It doesn't have to be a huge amount, a lot of little amounts will do the job. $1 of debt costs around 4c to buy. So $1 buys ~ $28 of debt.

I will help promote & donate money to a UK version of this if someone will organise it.

What is the UK Spending on Debt Servicing?

Since 1 Oct  I've been telling people that the interest payments on our debt take up a significant proportion of GDP each year. I estimated that the interest on the £7 trillions of private debt might amount to about 45% of GDP each year - assuming an average 10% interest rate.

Now in an online review of the 2012 edition Occupy Money, It’s the Interest, Stupid! Why Bankers Rule the World, Ellen brown reports that an economist has calculated the amount in the USA as 35-40% of GDP.

This is bad news for the UK as our private debt is much higher than the USA - which is a factor in why their economy is in recovery and ours is not. Their private debt peaked at 303% of GDP, whereas UK debt peaked at 475% of GDP (according to the 2011 Budget Report). Current rates are about 250% in the USA (according to Steve Keen and this graph) and 450% in the UK.

USA Private Debt 1920-present

UK Private Debt 1987-2010

And note Steve Keen's important point that even now private debt is much higher as a percentage of GDP than it was at the peak that caused the Great Depression.

Now if the USA is losing 35-40% of it's GDP then proportionally the UK is losing much more. I'm hesitant to put a figure on it based on this information it has to be more than 50%. And this is a chilling figure. Imagine if Camoron was right and we were to treat the UK like we were running a credit card. More than half our income is going on interest payments, let alone paying off the principle.

And just a note to acknowledge that Robert Peston wrote about this on the BBC Website in November last year.  His figures are from a different source, I prefer to use the government's own figures - the differences reflect the difficulty in calculating these figures. He has UK private debt at 481% of GDP in 2008 and rising to 492% in 2011 (or £7.4 trillion). The rise is being driven by financial institutions. So actually Peston's analysis is even more pessimistic than mine. I've tweeted him to ask what he thinks the interest payments might be. Chance of an answer is about zero, but one has to try.