As a friend of mine who knows about these things puts it:
There is a huge, massive, colossal UK structural financial deficit. In the current financial year the UK govt will spend £127 for every £100 that it is able to raise in taxes, and borrow the extra £27.
Now, the thing is, the proportions are correct in my last sentence but the actual numbers are somewhat bigger. The £27 isn't £27, it's near enough £180,000,000,000.
The £180 billion is not the total of government spending - that's just the government spending over and above the tax-generating capacity of the economy. The actual total of government spending is £680 billion a year. If you want to see where it all goes there is a really handy graphic done by The Guardian here (it's a pdf so you need Acrobat Reader).
On that chart you can see most of the cost of the bank bailout - "Financial Stability - £85.5 bn". The National Audit Office, by jiggery pokery I haven't fully worked out yet, makes that number higher, possibly as much as £131 billion. But either way that leaves a massive chunk of deficit, around £50 billion at its minimum, not accounted for by the bank bailout. Furthermore, the bank bailout is (probably) over. The banks that have taken the State shilling are actually making lots of money again now, starting to repay its state IOUs and in the cases where the state has taken part or total ownership, it directly benefits from the profits of the banks. The £50 billion (or £80 billion) is the structural deficit. And that's continuing to ratchet up, day by day. The structural deficit is built into the fabric of the economy and happens every year unless structural changes are made, whereas the cost of the banking bail-out was a one-off.
Why is there a structural £50 billion deficit, then? Because although NuLab continued with the previous Conservative public spending plans for the first few years of the Blair government, they subsequently tore up the rule book and declared every year of bubble growth to be 'normal and sustainable' and basically spent as if there would never be another recession ever again. Of course, Gordon had not abolished boom and bust at all, no-one ever will .That is why you have to balance the books over the life span of the normal economic cycle. You are allowed to have Government borrowing in the bad years, but you repay it in the good years. That was suppoed to be 'Prudence' Brown's 'golden rule'. He said it was.
But the way he cheated was by continually redefining the length of the economic cycle - basically by predicting that there would never be a down turn, and then massively let rip on public spending. Short term popularity and warm fuzzies at Labour conferences.
So, now even taking the banking bailout out of the numbers, the nation spends more than it earns by around £50 billion a year, or looked at another way, one thousand million pounds a week. That's why the government hasn't enough money.
Its punitive tax increases are not designed to increase the tax take - they go beyond the demosntrated point of maximum yield on the Laffer curve and will reduce the tax take by disincentivising people. The point of the recent tax hikes has been electoral calculation - an attempt to force the Conservatives into saying they will reduce tax rates (in order to maximise the actual tax yield). That if course is what Balls and Brown in particular regard as establishing a 'political dividing line'. Obviously it is intended to motivate their own core vote, but they also believe the average voter may be suckered into believing that a) it's all the fault of the banks, and b) you can make up the difference by taking the rich.
You can't. The numbers just don't work. As the IMF will shortly be along to remind us, as it will in Greece, the only way out is to reduce publc spending to below the amount of tax that the economy can yield .Usually allied to a big burst of inflation to devalue the accumulated debt. Of course, even if Gordon get back in he will then be able to blame the nasty IMF for cutting expensiture so it won't be his fault at all. If the Conservatives get in and reduce public spending, the Nu Lab political calculation is that will give them a great platform for opposition sniping with a view to saying "Tory cuts - what did we tell you? for five years and then coming back into power at the election after next.
Frankly, if there was ever an election to avoid winning, this is it.
And of course because of this awful financial mismangament, we will soon be hit by massive inflation. My friend continues:
The timing of the inflation phase is not yet clear. When it comes it will be substantial. There is a strong argument for converting at least part of UK cash savings into things which are a better hedge against inflation. Stocks of companies with strong overseas earnings; commodities, etc.
The difficulty is that a lot of the smart money has been piling into these things for some time, which is why the prices of oil ETFs are high, and one reason why gold has had such a good run over the last year or so.
Some people try to hedge by currency trading but that's hard to call, way beyond my expertise. I would buy Deutchmarks if there were any, but the Euro is a different kettle of many fish. I think the dollar is probably a better bet than sterling, but don't invest anything on my advice. Some people say oil is currently overpriced due to speculation, and maybe it is in the short term, but there may be an attraction in (effectively) buying all your future fuel now at pre-inflation prices. I dunno.
Diversify, I guess, and don't forget about tinned food.
