Cutting the UK deficit, is it really happening?

Ark_Welder

help.......

pqrdef

atush wrote: »

The interest on the deficyt (which is in effect a loan) will and has Added tot he deficit.

The national debt is a loan that attracts interest. The deficit is the annual difference between income (tax take) and expenditure. Deficit reduction isn't about clearing the debt, or even beginning to pay it down a bit. It's only about balancing the annual budget.

The interest on the debt enters into the budget on the expenditure side. But the interest is cheap, which is fortunate, because there are no plans for reducing this item.

Future generations of economists will be utterly amazed that we aren't taking advantage of low bond yields to pump money into revitalising our decaying economy.

Jegersmart

As others have said it will take years, it is a bit like watching a VLCC come to a halt and then try to make a 180deg turn. It is agonisingly slow. Of course this also assumes that the political will is there to keep going, at the next election another party may offer tax cuts and other incentives so that us the taxpayer will vote them in - the irony is that the incentives they offer will all be paid somehow by us anyway. Hopefully we can keep the austerity measure in place long enough to reduce our debt without too much hardship as a nation.

opinions4u

Government spending is forecast to outstrip income between now and 2015.

That is the plan. That is information in the public domain.

The state will continue to increase it's debt year on year. Just by a bit less each year.

gadgetmind

globalds wrote: »

The rumour is there may be more QE ..you won't believe how quickly we can add to the deficit then.

My understanding is that QE reduces the deficit in two ways.

1) HMG buys back its own gilts using newly made electronic money. This directly reduces government debt as there are fewer gilts out there.
2) Creating all this new money causes inflation, so any non-linked gilts in circulation will be cheaper (in real terms) at maturity when HMG is forced to buy them back at face value.

Ark_Welder

gadgetmind wrote: »

My understanding is that QE reduces the deficit in two ways.

1) HMG buys back its own gilts using newly made electronic money. This directly reduces government debt as there are fewer gilts out there.
2) Creating all this new money causes inflation, so any non-linked gilts in circulation will be cheaper (in real terms) at maturity when HMG is forced to buy them back at face value.

QE doesn't reduce the amount of debt - it still exists but is owned by the BoE and it still has to be serviced. What QE does is increase the supply of money in the market, which - in theory - should make it easier for individuals and companies to borrow, and its inflationary effects are intended to avoid the type of deflationary spiral that was one of the reasons why the after-effects of the 1929 stock market crash turned into the Great Depression.

Although inflation has increased over the last few years and the supply of gilts has increased, the prices of gilts has risen and the yields on them are below the current rate of inflation - not something that would be expected if there were long term concerns about inflation (although this could change). Note that the rise in gilt prices should mean that the BoE is sitting on a small profit - perhaps I'll amuse myself sometime by working out the actual amounts (it's what rainy afternoons are for...).

One point to remember about inflation is that it is not simply a case that current debt is necessarily easier to service (which actually requires a growing revenue): in today's money, index-linked gilts do not change in value - the cost of redeeming them and paying the interest remains the same. Similar for index-linked pensions, both current and future. Talk about how inflation is being engineered to 'reduce' the size of debts usually fails to mention these aspects.


How will deficit reduction progress? My thoughts are that it will be a long and slow process with little or no growth in the economy for a number of years, possibly with the occasional dip into recession (defined two successive quarters of negative growth, which is not a growth rate of +0.2%, which is expansion and not contraction.). QE will be unwound, which should have a deflationary effect due to the reduction in money supply, so the rate of inflation should move lower.

So how does this affect my investment decisions? At the moment, all cash holdings that have a maturity of greater than two years are in ILSCs. Inconsistent with expectations of lower inflation, but they are more like an 'insurance policy' and form arount 30% of cash holdings. I see ILSC's as a better bet than IL-Gilts because the latter are expensive and they can return less in nominal terms than the original investment even if held until maturity, whereas ILSC's do not.

I have been thinking about investing in some longer term fixed-rate accounts as it does not look as if interest rates will be rising for a while, and when they do it does not necessarily mean that rises will immediately be passed on to savers. 3 or 5 year term? Undecided for now, although probably be closer to 3. Currently have a neutral allocation to cash overall.

Corporate and government bonds and funds. Around 30% of assets, of which 40% are index-linked (mostly in SIPP) and just over 20% are high-yield, no direct gilts of any persuasion. Slightly overweight in this area due to low growth expectations Wide geographical spread.

Equities are underweight to the same extent that bonds are overweight. PE/VC and property (commercial, funds) are underweight to the same extent that Other (i.e. Bling and listed hedge funds, etc) are overweight - but only a percentage point off neutral. Again, a wide geographical spread.

For me, it will be a case of tinkering at the edges rather than making sweeping changes. At some stage I will look to reduce bonds and increase equities and PE, but will be waiting for more clarity before doing this (unless the itch to trade becomes too much! ). One advantage of moving into longer term deposits is that I will be less likely to reduce cash, but don't watch this space!

gadgetmind

Ark_Welder wrote: »

will be waiting for more clarity before doing this (unless the itch to trade becomes too much!

I've been picking up FTSE blue chips of the high-yield and (hopefully!) non-cyclical or recovery type over the last few weeks, with most of it concentrated in the two really big dips. However, I am still sitting on some cash and am waiting for more opportunities.

I totally agree regards ILSCs and we're maxed out on these.

atush

That's complete rubbish.

We are adding to the deficit by the about the same amount this year as last.

No your response is complete rubbish.

If the cuts hadn't been made we would have been contributing MORE than last year's total to the deficit. And also we would paying more interest ON that deficit as we would have lost our AAA rating by now.