Hopi explains the basics and spells it out for the Tory hacks in such easy terms even they should get it…
First, what Ed Balls said was “We have acted in the downturn, that will mean that the economy is stronger, we’ll have less unemployment, less debt.” Balls is saying that we generate less debt by shoring up the economy now, leading to lower unemployment and stronger growth figures, which in turn leads to less future debt overall. In other words, if we hadn’t acted, growth would be worse, the future public finances worse and there’d be less money to spend.* Apparently this statement of the countercyclically bleedin’ obvious is a “lie”.
Debt matters as a reflection of your ability to pay it back. If I owe a million pounds, it’s a crisis. If Bill Gates owes a million pounds, it’s an accountancy error. The same thing applies to nations. A country with a growing economy and growing tax revenues can service more debt. Debts that would force Henry VIII to nationalise the monastries are trifling to us because our GDP has grown.
Failing to understand this marks a journalist out as a numbskull, not a populist hero. It’s not even that hard to relate to day to day life. Mr F Nelson is political editor of The Watcher. He earns £50,000 and has a mortgage of £200,000 with repayments of £12500 a year. He has a debt to annual income ratio of 400%! Debt repayments take up a quarter of his income! Eeeek!
Fortunately, the next day he is made political adviser to the leader of the keepthingsthesame party at a salary of £400,000. He now has a debt to annual income ratio of 50%, and the cost of servicing that debt is a tiny 2.5% of his income.
If you can’t get that… choose this… (from the incomparable Beau Bo D’Or)
At the risk of making myself look ridiculous, I should point out that in my rush to publish I forgot that 12500 is 3.125% of 400,000. I make a lot of dumb mistakes like this, which is yet another reason I’m glad I’m not a minister…
If you read a couple of posts before that Hopi was having a moan about the lack of detail offered up by politicians & pundits and how poor most peoples understanding is of these things.
Inside about 8 hours he’s trying to suggest that everyone knows the distinction between debt and debt ratios.
He’s right on the explanation (and Fraser at the Speccie doesn’t dispute any of that) but his blind loyalty over Balls is laughable really… see Tom Freeman’s more honest comment in the same thread….
Feeble.
The worst bit of the debt (the structural deficit – the bit that requires the cuts) was built up during Gordon’s boom years. Global boom – not his doing. If he’s not taking the blame for the bust, he can’t take credit for the boom.
However he should take the blame for the state of the public finances. Brown didn’t prepare the economy and the public finanaces for the INEVITABLE slowdown, because AS HE KEPT TELLING US he’d abolished boom ‘n bust.
You pathetic labour slugs keep pretending your man brown is anything other than an idiot. I’ll carry on laughing (were it not so tragic).
The only consolation is the client state of diversity outreach coordinators and council prodnoses will soon be collecting their long overdue p45s. As will a large number of Labour politicians.
Nice to see you engaging in personal abuse rather than contesting Hopi’s central point, Jackart. If the Government had taken the advice of the incompetent Osborne and the ‘do nothing’ party they would have let the banking system collapse, thrown millions on to the dole queues, reduced output, and still increased the debt burden in benefit payments.
Twerps like you were predicting Labour’s defeat in 2001 and 2005… but your prediction skills are as hopeless as your other ‘qualities’.
And STOP SHOUTING! It makes you look ridiculous.
I addressed the point over at Hopi’s blog. I don’t know how you can defend this Government’s economic record. Labour have bankrupted the country. Again.
Seriously. Electoral oblivion awaits Labour. And not a moment too soon.
Very poor attempt to deflect attention away from the painful reality of the situataion.
Our debt/GDP ratio is rising all the time and, if Gordo ever dared to include public sector pensions (which have risen astronomically since 1997) and PFI (which has also risen astronomically since 1997) the debt/GDP ratio would smash the 100% barrier in an instant. It’s already forecast to be around 75% by the Treasury even without these extra problems thrown in.
I like this post, despite not believing a word of it.
Can I offer a counter-example:
Mr Piper is a local councillor with an interesting blog as a side project. Mr Piper takes out a 125% mortgage from Northern Rock, which is permissible due to the poor system of bank regulation. He does this knowing that when he stops being a councillor he will devote his energies to his blog full-time, turn it in a subscription model and make a very decent income.
His financial projections for the subscription blog are dismissed by all independent experts, but Mr Piper ignores their warnings.
Sure enough, when Piper launches his subscription blog, former readers quit in droves. Thinking this is due to the design and speed of the site – he spends more money making the site looking glossy and modern. When this doesn’t work he is forced to make unpalatable choices like accepting advertising – but those sources of income dry up too when his readership desert him.
Finally Mr Piper manages to restructure his mortgage. In return, Northern Rock force him to cut back on most discretionary spend. The deal nearly falls apart when Mr Piper admits to some other loans from family and friends that were hitherto unreported.
Mr Piper and his blog continue to operate, but in much diminished capacity. If only he had listened to the experts.
PS no such thing as a “statement of the countercyclically bleedin’ obvious”. Governments can spend – but doesn’t necessarily protect jobs. Often it crowds out third party investment – particularly if paid for with an increase in national insurance.
James, I like that. You’ve clearly put some effort in to it. Of course, Mr Piper might also adopt the more Conservative option.
He is a Conservative Part leader with an interesting blog as a sideline. Realising that his readership is not increasing significantly beyond its current level, he faces a readership crisis. So, he decides the best option is to do nothing substantial whatsoever.
So he stops posting altogether, but instead spends some money tarting up the appearance of the site, in the hope that those who do drop by will be so impressed with the presentation, they won’t bother about the fact that there is no actual content.
Much to his surprise, once his readers closely inspect the site they realise they are being conned, and they drift away elsewhere, leaving him confused…. and ditched by his colleagues.
Hopi is right when he infers that affordability is the key. And as long as interest rates remain low then it is debt a growing economy should be able to service. One problem, however, is that our lenders (China, Saudi Arabia etc) may well require a (much) higher return for their loans and then what? They also may want their money back at some time. So George Osborne is right when he says we should have a debt repayment plan in place. F Nelson may have a £200,000 mortgage, maybe interest only, but he can sell his house to repay the capital. But as a country, we have to find the money from (higher) taxes, or reduced spending, or both. There is no escape.
ifabloke….
…if we don’t get the growth from investing (and even then maybe).
But the Tory plans of cuts now guarantee we won’t get growth, and that we will fork out more on benefits, and have to introduce tax increases… and lead to further cuts in health, education etc.
I don’t disagree with you, Bob, but that depends on where the cuts will be, and as I’ve said before, and we all know (even you talk about ‘further’ cuts), there will be cuts. The debate should be on where they will fall. It’s an argument Labour could win if they would just admit it.
And do I see that GB has said spending will rise by 0%? Is he mad, or on something?
I like Hopi’s post. The one flaw in his illustration is however that Fraser doesn’t need to borrow the money every year.