Consumer morale near 2-year low in November

tomterm8

The reason that public spending reached such a high percentage compared to GDP is that we have just had the worst recession since 1960 (and we only escaped the worst recession since 1920 by really extraordinary measures). Deficits always rise massively during recessions. We also spent 7% of GDP bailing out banks.

A massive deficit was inevitable as a result of the banking crises, it is a predictable consequence, irrespective of spending cuts. In an IMF survey of banking crises, it happened every single time.

A large fragment of the spending will naturally fall over the next three years, that is the spending caused by recession... as long as we don't cause another recession by cutting public spending too quickly.

Really2

StevieJ wrote: »

Who I find bizzare are the people who believe that the Tories (free marketeers) would have done any different to Labour, especially with regard to control over the banks, we all remember that report produced in 2007 calling for a reduction in govt control over bank lending (that soon went under the carpet ).

What was it that the report said, oh yes I remember

I don't think they would have on the free market, but they would have in regards to public sector debt.

Putting it all down to the banks and forgeting that had we not built up a big pre budget deficit ignores where we are now.

If we had no deficit or heaven forbid a surplus during a boom that would mean we could have carried on spending now.

Why do people just pin it on the banks, in a boom we were spending well over tax revenues that is the main reason we had no movement when the bust happened (in terms of public sector spending).

Sir_Humphrey

Perhaps this (fictional) story might provoke some Friday afternoon thoughts about the weirdness of how the world works.

A government signs contracts with companies which are very wasteful.

An incoming government (quite rightly) changes these arrangements to save public money.

They then use the proceeds to cut taxes for those businesses. (Hmm).

Really2

Sir_Humphrey wrote: »

Sorry, but running government finances is not like running a business.
1) How many businesses still have to pay people a wage after sacking them for instance?
2) How many companies (legally!) pay themselves what they are charged for VAT? (Two instances of many I could mention).

1) Non Executive directors
2) !!!!!!?

You miss the point I am talking about book balancing and forward running.
I think it is fairly clear in the point I made about wages.

As for your vat thing I have not got a clue what you are on about, VAT is a tax gathered for the government by businesses.

I did not say the goverment is identical to a business did I, I said I think of it like business (EG what would creditors be doing to UK PLC if it were a company).
Its it wages are higher than its income it has to borrow, it can only borrow so much before it needs to pay off debt or gets liquidated.

tomterm8

StevieJ wrote: »

Who I find bizzare are the people who believe that the Tories (free marketeers) would have done any different to Labour,

Well, I think it was beyond the control of either Labour or Tory governments, to be honest. John Majors government actually implemented some really good regulatory reforms, which I thoroughly agreed with.

While the Labour government got rid of these reforms, and introduced the shambolic system we have now... the system was basically dictated from Europe.

A huge amount of the blame for the banking crises lies with europe, I have to say I have gone from being a europhile to someone much less convinced over the last four years.

StevieJ

Sir_Humphrey wrote: »

Sorry, but running government finances is not like running a business. How many businesses still have to pay people a wage after sacking them for instance? How many companies (legally!) pay themselves what they are charged for VAT? (Two instances of many I could mention).

One thing that is similar is the effect of reducing spending on businesses that rely on that spending.

Remember that spending is a big merry-go-round. Money spent by government then gets respent by the person who received it. Some of it ends up back in government via tax.

And some back in private industry coffers

Sir_Humphrey

Really2 wrote: »

1) Non Executive directors

So, not many then.

On VAT:

When a government has to pay out VAT, the VAT is paid back to the government. When a (non-VAT registered) business has to pay out VAT, this goes back to the government. VAT-registered businesses can claim back VAT of course.

I do not actually know if the government claims back VAT. I doubt the Treasury would like it if Departments did so.

On outgoings more than ingoings:

Governments can borrow far more cheaply than businesses. For the UK government, this is particularly the case becasue the bonds are unusually long-dated and are also mainly held by UK pension funds rather than foreigners.

It is far more difficult for governments to cut costs. If a business cuts costs by sacking people then they are passing on costs to government (which has to pay dole etc). If the government sacks someone they still have to pay dole. Therefore the saving is only the difference between their former wage and the dole.

However, it is even more difficult than that. That person has no wage so does not pay income tax and spends less (so is taxed less VAT etc). The businesses they spent that money on have lower turnover, so pay less tax. Thye may have to sack people, which reinforces this cycle.

This is why cutting a deficit in a recession is a bad idea not just for the misery it causes, but also because it is almost impossible to do for those reasons. Unless you are happy to let people starve or plunder neighbouring kingdoms, which is what happened before governments ran deficits.

EDIT: Running a trade surplus is in fact more or the less the same thing as plundering a neighbouring country BTW.

tomterm8

Also, government differs from businesses because it is not financially constrained at all by what banks lend it. Governments have the means to repay the deficit at any time it chooses. During 2009, the UK government printed every single pound it spent. For government, debt is an accounting fiction, but it is not constrained by what people choose to lend it.

Thrugelmir

tomterm8 wrote: »

The reason that public spending reached such a high percentage compared to GDP is that we have just had the worst recession since 1960 .

Even Tony Blair admits that the rise in public spending should have been curtailed from 2005 onwards. So the recession alone is not an excuse.

Thrugelmir

Sir_Humphrey wrote: »

Governments can borrow far more cheaply than businesses. For the UK government, this is particularly the case becasue the bonds are unusually long-dated and are also mainly held by UK pension funds rather than foreigners.

TomTerm8 - Also, government differs from businesses because it is not financially constrained at all by what banks lend it. Governments have the means to repay the deficit at any time it chooses. During 2009, the UK government printed every single pound it spent. For government, debt is an accounting fiction, but it is not constrained by what people choose to lend it.

For the record some interesting extracts published at the end of QE earlier this year.

Over the past year, the government has had little problem funding its borrowing requirement as the Bank of England has absorbed nearly £200bn of gilts. Last week’s decision by the Bank to suspend the APF, however, means that the gilt market can no longer rely on central bank purchases. Indeed, at some stage, the Bank will seek to sell its APF gilt holdings back to the market as it seeks to reverse its policy of quantitative easing. The prospect of a double whammy of elevated government bond issuance and future central bank gilt sales pose a upside clear risk to the future path of UK government bond yields.

To meet the planned increase in supply, the appetite to hold gilts by the private sector will need to rise sharply. The extent to which gilt yields will need to rise to generate this increase in demand will depend on trends in domestic saving and the asset allocation choices investors make over the coming years.

Over the past two years, saving by the UK private sector has risen sharply, as both households and corporates have sought to repair their balance sheets and pay down debt. The UK household and corporate sectors are now both generating financial surpluses (positive cash position). These surpluses, coupled with that of the financial sector, and the inflow of foreign capital to finance the current account deficit, have provided the funding for the UK’s rising public sector borrowing requirement. Over the coming years, we expect these trends to continue, as the household, corporate and financial sectors continue to repair their balance sheets, which have deteriorated dramatically in the last 10 years.

Nevertheless, it is highly doubtful that domestic private sector saving will rise sufficiently to absorb the additional gilt issuance over the coming years; even if it did, the likelihood is that most of the saving would be held in cash. To put the requirement in perspective, at end-Q3 2009, the market value of gilts held by the domestic private sector was just under £400bn, or just over 50% of the total value of outstanding gilts. The remainder was held by overseas investors (£217bn) and the Bank of England (£151bn).

To make up for the potential shortfall, either overseas investment in the UK gilt market may need to rise sharply or, more likely, there will need to be a substantial shift out of cash and equities within the UK into government bonds. Given that foreign investors already hold around 30% of the gilt market, a substantial increase in their holdings is unlikely - at least in the absence of a marked fall in sterling’s exchange rate and/or a sharp rise in gilt yields.

Like Japan. Domestic demand may be necessary to fund the deficit in coming years.