UK Government Spending: Where It Needs To Be Cut And Why

This is a pair of pie charts showing the UK Government’s income and expenditure from a couple of months ago. This will doubtless be revised after the emergency budget on 22 June. You can see the size of the problem here. The difference between cash in and cash out is made up by borrowing. At the time these graphs were were produced, the gap was £704bn – £541bn = £163bn.

These numbers are generally expressed as a proportion of GDP. The limit under the Maastricht criteria was 3%. The UK is not in the Eurozone, but reports these numbers anyway. The situation improved somewhat recently to around £156bn p.a., but that is still bad at 11.6% of GDP.

UK borrowing below forecast, still worst since WWII

The questions are these.

Justification

Why is it OK for some people to spend other people’s money? If we continued on the previous path without cutting public spending, we would borrow maybe an additional £1,000bn over the course of a parliament. It would take probably 40 or 50 years to pay that back at best. We are spending it now, but will not hang around to pay it back. Why should people graduating with me this year have to pick up that tab?

Do we need cuts?

startup planning notes mac book
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There are still people who want to borrow more and spend more. “Now is not the time to be making severe cuts to the economy. Cuts too deep and too soon risk the economy falling back into recession,” said Brendan Barber, TUC general secretary, which has warned that the plans could increase unemployment and the benefits bill. Well, that’s true – but what is the alternative?

Where to cut?

If you want to solve a cashflow problem, you have to reduce spending and increase income (or taxes). The government has decided this split will be 80/20. If you want to do something serious about this problem, you have to look at the largest item, which is by far social security spending at £231bn p.a. on the above pie charts.

To put that in perspective, the LHC, which is the most expensive scientific experiment ever built, cost £5.6bn.

http://en.wikipedia.org/wiki/Large_Hadron_Collider#Cost. What would the UK economy be like if we built 41 LHC’s in Leeds every year?

See Also:

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

Where To Cut UK Government Spending: An Alternative Approach

Where To Cut UK Government Spending: An Alternative Approach

#Norway Is Still A Safe Investment Option

Norway and NOK: yes

white car on the road
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So the next question is where can I avoid getting killed since the whole world is blowing up? People keep asking me this. Also there is some kind of idea that because not all currencies can go down together (true) it doesn’t matter where you are (false).

In the US and the UK, there are totally unsustainable borrowing profiles which are politically extremely hard to shift in a democracy. Much of the US budget is entitlement spending; an operational leverage effect that results from that means that any serious cuts have disproportionate effects on the remaining programmes. I still like the US in general because it has the world’s most dynamic economy and the politicians may be smarter than the population and understand that cutting back on immigration is rather bad demographic economics. But you can’t really park there.

In the UK, we have bizarrely just lost the Chief Secretary of the Treasury to a rental payment scandal in which one cannot be sure that his treatment would have been identical had he been heterosexual. He was looking very credible at cutting sufficiently to retain the Aaa rating – which is essential if this borrowing profile of a rather insane £156bn p.a. can come off with some kind of glide path down rather than a hard stop – but we now have the former Press Officer for the Cairngorms who will presumably be just as effective at putting The Fear into Work and Pensions and their £230bn annual spend.

rocky mountain near citizen houses near body of water
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So no GBP and no USD. EUR? Well, there’s Greece. And Spain. And now Hungary. So forget it. It might make holidays cheaper again, but that’s the only benefit.

All three of these problems have a long way to go before being resolved.

So nothing is left, right? No – there is Norway. Seriously. Why?

No debt

They have no government debt and so they do not pay interest on it – cf. UK annual debt service £43bn.

Big surplus

Even more amazingly, they have saved their oil revenue in a big pension fund worth about $443bn. They own about 2% of equity in Europe.

Own currency

The NOK has a number of great things going for it, including the huge pension pot, but also: it isn’t the EUR, the GBP or the USD.

So what should you do? Well, you could just buy the NOK and sit still waiting for the rest of the world to crater. You would probably make out in local CCY terms. But there are proper companies there doing serious things you could look at. These two have NYSE listings:

NYSE Global Listings

NYSE Technologies Global Market Data | as of 17:08 ET 03 Jun 2010 | Market data delayed
Name Symbol Listing Last Trade Date/Time Volume Change % Change
Seadrill Limited SDRL NYSE $ 21.20 03Jun10 16:48 ET 1,262,094 $ 0.41 1.97
Statoil ASA STO NYSE $ 20.96 03Jun10 16:02 ET 2,038,401 $ 0.35 1.69

You can guess what they do.

So you could even sit there and gain from any NOKUSD strength without lifting a finger or going to Oslo.

See Also:

What Is “Theory Of Mind?”

The Existence Of The Global Poor Does Not Mean We Can Address No Other Issues

The Psychology of Successful Trading: see clip below of me explaining my new book!

How To Profit From Thorium