If you'd like to republish any of my articles, you are welcome to do so. Please add a link to the original post on my blog.

Wednesday, 31 July 2013

UK National Debt and Welfare State

Niccolo' Macchiavelli statue, Piazzale degli Uffizi, Florence

The UK national debt at the end of the first quarter of 2013 amounted to £1 trillion and 377.4 billion, or 90.7% of total GDP (Gross Domestic Product).

Considering that Britain is the sixth richest country in the world, this is an astonishing figure. Could it have to do with how the economy is managed by our government?

The government is spending more money than it can tax, so it needs to sell bonds (called "gilts") to domestic and foreign investors. Gilts must be repaid in full, with interest. Unpaid loans form the UK's national debt. That debt is enormously growing.

What we have now is a peacetime record. The last time Britain borrowed so much money was during and after the two World Wars.

Spending by the government is similar to spending by the individual in that it can be divided into two types: to produce and to consume.

Spending for welfare state items like benefits and pensions is the most obvious consumption expenditure; health and education can also consume money, especially when they don't deliver.

In all these cases, the money, once spent, has gone forever, there is no return on it.

Spending productively is investing, and the money spent repays itself. The government does that when it invests in infrastructure like energy, transport and communication systems. These will help the country's businesses, increase productivity, generate jobs.

When people demand that the government "create jobs", they often have in mind what Labour did in the interminably long years it was in power from 1997: create redundant, unproductive public-sector jobs draining money from the public coffers. Not all of these jobs are redundant, of course, but a surplus of them just to keep people in employment is.

The government's role is not to create jobs, but to put industry and commerce in the best condition to create them.

The government has a choice: spending - and borrowing - to maintain and even increase our gargantuan welfare system or invest in infrastructure.

There is a limit even for our corrupt, indebted government to how much it can borrow. Money which is spent on benefits will not be invested in infrastructure.

This is why we are caught in this vicious circle of ever-increasing national debt spiralling out of control.

The British government, like Obama's America and the ideologically Leftist political elites of other Western countries, enacts policies not dictated by economic sense but political expediency.

Unfortunately, as Churchill said, democracy is the worst form of government except for all the others.

Democracy, combined with high levels of prosperity, has led to a system in which the politicians bribe the electorate with welfare cheques, food stamps in the USA, and other freebies.

Their preferred choice to be elected is the easiest way, the path of least resistance of liberally giving handouts to voters, putting into practice the long-established crooks' method of spending other people's money with largesse. Why should they care? It's not theirs.

While they are getting elected and re-elected, in the meantime this economic policy can only produce a long-term effect: if the public money is consumed but not invested productively it will constantly decrease, and can only be replaced and repaid by higher tax rates and higher levels of borrowing.

Both of these are deadly for the economy. Higher rates of taxation discourage business and therefore productivity, leading to less hiring and more unemployment. This also results in lower tax revenue, even if the rates are high, because there is less wealth to tax. Elevated fiscal rates have the other undesirable effect of leaving less disposable income available for consumer spending, thus diminishing the demand for products.

Higher levels of public borrowing increase national debt, therefore interest and eventually, due to creditors' mistrust causing reduced credit rating, the interest rates at which the country can borrow.

Britain has recently lost its top triple A credit rating with some agencies.

This is how the government spends our money:
  1. Pensions - 21%
  2. Health care - 18%
  3. Welfare - 17%
  4. Education -13%
  5. Interest - 7%
  6. Defence - 6%
  7. Protection - 5%
  8. Transport - 3%
  9. General government - 2%
The public finances are dominated by the welfare state, which comprises the first 4 biggest items in the budget. The welfare budget includes pensions and tax credits, as well as unemployment, child support, housing, sickness, council tax and other benefits.

The 5th item is the interest on our debt, which exceeds defence, protection - which encompasses protection from crime, emergency services, public order and safety - and transport. The projection is that by the end of 2013 interest will have become the 4th largest public expenditure, overtaking education.

The original purpose of the welfare system was to give a safety net to people in exceptional circumstances but, due partly to the new Marxist idea of redistributionism - redistribution of wealth in society, which in no way should be a democratic government's function - and partly to politicians' tactic of bribing voters with benefits, it has grown into something completely different, which is not just suffocating but slowly killing the economy.

If public money were spent more on investments to help productivity, there would be less need for dole payments. It's a question of rational choice and correct priorities.

1 comment: