How does government spending on one off issues differ from longer term ones?

[Systemwide]

Hi All, Good Evening,

I wonder if I may pose a question or several here, related to the actual 'money' involved?

So, the Government position is that there is no money available to offer modest pay rises for the various groups such as teachers, NHS, rail staff etc.

But, whenever anything happens anywhere in the world, we see the same UK Government are the first in the queue with a blank cheque-book, signing away money that we don't allegedly have to spend? I'm sorry I can't think of a good example here right now, but when it suits them, spending large sums of money seems to be the only thing this current Government are any good at? We are not talking large sums of money to settle ALL of these disputes are we?

So, I can confirm that I'm not having a dig at committing money to Ukraine or natural disasters for example, but, just how come there is no money for things 'at home' then?

I don't accept the argument of funds going overseas coming out of 'a different budget', on the grounds that if you have a £10 note in each of your coat pockets and you spend £10 on something, you have STILL only spent £10, regardless of what pocket you took it from, haven't you?

We all now know that it would've been cheaper to have settled these disputes ages ago, this has been admitted on record I believe.

As for spending so many billions keeping the trains running during COVID, I certainly know what a large commitment that was financially but, is this REALLY all about clawing that money back? by destroying a network that when it worked well, used to be pretty damned impressive and a major artery of the UK, unlike now where it breaks their heart to run a train on time anywhere without blatantly mis-regulating somehow and destroying the lives of the end user? I'm thinking of people who've lost or changed jobs for example due to unreliable service patterns over recent years.

Final thoughts, has anyone else noticed the media lies telling us that nobody is using the railways these days, yet, you never see these people filming on the network early in the morning or late in the day when the trains are full and standing? Engineered Narrative? Surely not!

Many Thanks,

Kindest Regards,

SW

 

[JonathanH]

So, the Government position is that there is no money available to offer modest pay rises for the various groups such as teachers, NHS, rail staff etc.

But, whenever anything happens anywhere in the world, we see the same UK Government are the first in the queue with a blank cheque-book, signing away money that we don't allegedly have to spend?

There is a difference between one off spending, and increasing spending in all future years. Paying an increase to workers means that money needs to be found every year in the future.

As a country, the fact that we are so heavily hooked on cheap imported goods does mean that we have to expect to get poorer. It is just how it works. The reality of this will evolve over time.

The issue is not affording things now, it is how we are ever going to afford them in the future.

The challenge is that inflation is really scary and no one knows how to stop it.

As for spending so many billions keeping the trains running during COVID, I certainly know what a large commitment that was financially but, is this REALLY all about clawing that money back? by destroying a network that when it worked well, used to be pretty damned impressive and a major artery of the UK, unlike now where it breaks their heart to run a train on time anywhere without blatantly mis-regulating somehow and destroying the lives of the end user? I'm thinking of people who've lost or changed jobs for example due to unreliable service patterns over recent years.

It isn't clawing it back at all. It is trying to find ways to save future costs.

I think there is an attempt to find some sort of compromise between what we want to afford and what we really can afford when the bank is empty.

 

[Systemwide]

There is a difference between one off spending, and increasing spending in all future years. Paying an increase to workers means that money needs to be found every year in the future.

As a country, the fact that we are so heavily hooked on cheap imported goods does mean that we have to expect to get poorer. It is just how it works. The reality of this will evolve over time.

The issue is not affording things now, it is how we are ever going to afford them in the future.

The challenge is that inflation is really scary and no one knows how to stop it.


It isn't clawing it back at all. It is trying to find ways to save future costs.

I think there is an attempt to find some sort of compromise between what we want to afford and what we really can afford when the bank is empty.

Thankyou for this, I know its a complex subject when you get into details but this definitely helps me 'get it' a little more clearly, Cheers!

 

[Roger1973]

I'm not expert in the dark arts of public finances, but to expand on the one off / ongoing spending thing, there's a firm divide between 'capital' and 'revenue' spending certainly at the local authority end of things.

'Capital' spending will be a one-off, maybe building a new road, a new hospital, or a new bus station.

'Revenue' spending will be ongoing, the cost of maintaining that road, running that new hospital, paying the running costs of the bus station and ongoing funding of tendered bus services that run to it.

There will be times when capital spending will generate additional revenue spending in future years, there will be times it will (in theory at least) reduce it, e.g. a new building may be more energy efficient, or not need so much maintenance in the short to medium term.

Capital spending can generally be funded by borrowing and paid back over time. Revenue spending generally has to come out of a council's income (council tax, revenue grants, charges.)

This can encourage situations where it's more cost effective to cut (revenue funded) maintenance slide to the point where the best option is eventually a (capital funded) demolish and rebuild scheme.

 

[duncanp]

I'm not expert in the dark arts of public finances, but to expand on the one off / ongoing spending thing, there's a firm divide between 'capital' and 'revenue' spending certainly at the local authority end of things.

'Capital' spending will be a one-off, maybe building a new road, a new hospital, or a new bus station.

'Revenue' spending will be ongoing, the cost of maintaining that road, running that new hospital, paying the running costs of the bus station and ongoing funding of tendered bus services that run to it.

There will be times when capital spending will generate additional revenue spending in future years, there will be times it will (in theory at least) reduce it, e.g. a new building may be more energy efficient, or not need so much maintenance in the short to medium term.

Capital spending can generally be funded by borrowing and paid back over time. Revenue spending generally has to come out of a council's income (council tax, revenue grants, charges.)

This can encourage situations where it's more cost effective to cut (revenue funded) maintenance slide to the point where the best option is eventually a (capital funded) demolish and rebuild scheme.

It is the same in your own personal finances.

There is a difference between a single donation of £10 to a charity, for example, or setting up a direct debit for £10 a month to a charity.

An example of capital spending on a personal basis could be spending money on home improvements such as a new kitchen or bathroom. You could take a loan out to pay for the improvements, but before doing so you should consider your ability to pay the loan back given your other financial commitments. Or you could pay for the improvements out of savings, but before doing so you would have to consider whether you need to keep some of those savings for future commitments or just for a "rainy day".

Personal revenue spending includes the weekly food shop, utility bills and other things such as gym membership. If your income does not cover these items, you either have to borrow money or take it out of your savings. Eventually you will run out of savings, or reach the limit on your credit card.

Indeed there have been reports of people, during the current cost of living crisis, building up large debts on credit cards just by paying for the weekly food shop on a credit card because they can't afford to pay for it any other way.

You don't have to be an expert to see that this is unsustainable on a long term basis.

The big difference with government spending is that they can, in theory at least, fund expenditure (of both types) by raising taxes. But it doesn't always follow that raising taxes will bring in extra revenue, as increasing the rate of VAT, for example, can cause people to stop spending money on non essential items to which VAT is applied.

This is why you find taxes are levied on items with inelastic demand such as petrol, alcohol or tobacco.

 

[Yew]

It is the same in your own personal finances.

No, it's not at all.

 

[RT4038]

No, it's not at all.

Ah yes, there is the South American school of economics.

 

[Yew]

Ah yes, there is the South American school of economics.

When is the last time your household minted your own coins, or collected taxes from its imhabitants, or agreed a free trade deal with the neighbours? There are so many things that a nation can do that a household or individual cannot that it is inherently obvious that the idea is not rooted in the economic reality.

 

[Magdalia]

Hopefully I can help a bit here. This is what is usually called fiscal policy: what the government spends its money on, and how it raises the funds to pay for it. The government has two main sources of funds: taxation and borrowing. Within taxation, income tax, corporation tax and VAT are the biggies, everything else is peanuts by comparison. Borrowing is mainly issuing government debt, usually called gilts.

Every year there are usually two main fiscal events, the budget, which is usually in the spring, and the autumn statement. HM Treasury is responsible for these, and the Chancellor of the Exchequer delivers them in parliament. Traditionally the autumn statement is mainly about spending and the budget about raising the funds to pay for it, but that boundary has repeatedly been blurred, and for a short while there were attempts to combine both into a single event. The government is also legally required to publish 2 economic forecasts each year and these usually come along with the budget and the autumn statement. The forecasts are supposed to demonstrate that the planned revenue will be enough to meet the planned expenditure. This is particularly important for reassuring the bond markets that "the sums add up", because they are the institutions that buy the gilts when the government needs to issue when it borrows more money.

But in the real world the budget and the autumn statement are sometimes overtaken by events. Forecast expenditure will therefore include contingency funds, which are supposed to cover unforeseen items. But recently we have seen at least three big unforeseen items that have swamped any funds set aside for contingencies: the pandemic, the war in Ukraine and the spike in energy prices. Go back a bit further and rescuing the banks after the 2008 financial crisis is another example. When events like these happen, in the short term the expenditure is covered by increased borrowing, but that only gets the government through to the next budget or autumn statement, when they have to bring forward a new plan for expenditure and how it will be paid for.

Ever since Gordon Brown became Chancellor of the Exchequer, there has been a broad consensus on how fiscal policy should operate in theory, which goes roughly like this: ongoing expenditure, averaged over the economic cycle, should be funded from taxation, it is ok to borrow for capital projects, but overall debt should not be allowed to get too big. The perception of what "too big" is has changed considerably: in Gordon Brown's era is was thought to be 40% of one year's GDP, now debt is about 100% of one year's GDP.

The debt as %age of GDP constraint is a bit like (but not the same) as the constraint of annual multiples of earnings applied by banks and building societies for mortgages on houses. It is an indicator of whether the government will be able to pay the interest on the gilts that have been and will be issued. The big difference is that, whereas the bank or building society lending on a mortgage wants its money back when the loan matures, that's only notional for gilts. In practice the government is usually able to replace maturing gilts with new issues, though not at the same interest rates.

 

[duncanp]

When is the last time your household minted your own coins, or collected taxes from its imhabitants, or agreed a free trade deal with the neighbours? There are so many things that a nation can do that a household or individual cannot that it is inherently obvious that the idea is not rooted in the economic reality.

I did say in my original post that the big difference is that government can collect taxes, and I do acknowledge that there are some differences between how government and personal finances operate.

However there are also some similarities.

If government expenditure exceeds income, that difference has to be paid for somehow, and the same thing applies to personal finances. Whilst a government has options available to it that are not available to private individuals, it cannot print money, borrow money or raise taxes indefinitely. You have only got to look at the reaction to Liz Truss's mini budget last year to see that. Or you can recall the note left for David Cameron by Liam ("..there is no money left..") Byrne, who is still a Labour MP.

Similarly there are items of capital expenditure in government and personal finances. Capital expenditure for a government might be building a new hospital, whereas for a household it might be installing double glazing or a new heating system.

Ultimately both governments and private individuals should aim to live within their means, or at least ensure that the level of debt is manageable, otherwise there will be negative consequences for all.