How to eliminate debt debit card?

Careful budgeting and cutting expenses can help you reduce credit debt. You should develop a solid strategy for eliminating your debt and stick to the plan, even if it means personal sacrifices such as fewer vacations, less shopping and dropping expensive hobbies.

Minimum Payments
Make more than the minimum payment. Low monthly payments can be attractive, but they also allow finance charges to mount. Paying as much as you can each month will lead to a faster elimination of your debt.

More Income
Find a second job. Use the extra income exclusively for paying off debt. Also use other windfalls, however small, to pay additional money to creditors. Use your winnings from the golf course or a scratch-off lottery ticket to pay down debt.

Fewer Expenses
Slash expenses in every way possible. Sell the newer car you're making payments on and pick up an older model for cash. Use the money you were spending on car payments to pay off other debts. Use the same strategy wherever possible. For example, switch to a cheaper cable television package or drop cable entirely. Or drop club memberships or find a less expensive Internet service provider.

Counseling
Make an appointment with a Consumer Credit Counseling Service (CCCS) agency for more help identifying expenses you can cut. CCCS is a nonprofit agency offering many free services, including household budget consultation. Find an agency near you by looking in the telephone directory.

Better Terms
Renegotiate loan terms. Call your bank or credit card company and ask for lower interest rates. That will result in smaller finance charges and allow more of your monthly payments to be applied to the principal. If possible, use zero-percent credit card bank transfers to pay off high-interest debt. You'll still owe the debt but you'll pay no interest through a promotional period that could last up to a year. Use that time to pay down as much of the principal as possible.

Bankruptcy and Settlements
File for personal bankruptcy or enter debt settlement. These are obviously last-resort options and will seriously injure your credit scores. However, all or some of your credit debt could be eliminated in just a few months through a bankruptcy filing. See a bankruptcy attorney if you feel that's a viable option for you. You can also settle your unsecured debt by reaching an agreement to pay your creditors less than the full amount owed. Generally, settlement agreements are possible only when your account has fallen four to six months behind. Contact your creditors for a settlement agreement.

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www.gudanggrosiran.com Categories: Credit Card, debt, Financial, Management, Money

Facts About Eliminating Credit Card Debt

As we all know, Eliminating credit card debt can take a long time if you don't implement effective techniques. High balances on your credit cards can negatively affect your personal credit score, and some lenders will not approve your request for financing with high debts. If you are planning on eliminating your debt, understand techniques to help reduce the balance quicker.

Credit Card Rate
The interest rate that you're currently paying on your credit card will impact how fast you're able to pay off the debt. Credit card companies charge minimum payments, which are approximately 2 to 3 percent of the outstanding balance. Making this small payment each month pays off the interest charges from the month and a small percentage of the principal. But if you are able to negotiate a better interest rate on the card, you'll pay less in interest each month and more of your payments will be applied to the actual principal, which reduces the balance faster.

Minimum Payments
For the above method to work, it's imperative to pay more than the minimum each month. It can take years to pay off a credit card if you are only making the minimum payment each month. But once you've asked for and received an interest rate reduction, use this as the opportunity to quickly reduce your balance. Make higher payments every month to put a dent in your outstanding balances. For example, a $200 payment can pay off a $1,000 credit card balance in about five or six months -- unlike $20 monthly payments which can take more than four years to pay off the debt.

Highest Interest Rate
Tackling the balance with the highest interest rate first is a key technique to eliminating your credit card balances. The card with the highest interest rate, regardless of the balance, will cost you the most money each month. Concentrate your efforts on paying down this debt first to reduce how much you spend in interest charges each month. Once you've paid off this card, move on to the card with the next highest balance. Take the money you saved from paying off the previous card and use this money to increase your payments on the next card.

Biweekly Payments
Some credit card companies give the option of making biweekly or twice monthly payments online. With this method, you make a credit card payment every two weeks -- at least half of the minimum payments. This payment technique is beneficial because you lower the risk of missing a payment and getting charged a late fee. Plus, biweekly payments can reduce the amount you owe in interest, which results in reducing the outstanding principal quicker.

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www.gudanggrosiran.com Categories: Credit Card, debt, Management, Money, tips

Tips, 8 Steps to Reducing Credit Card Debt

Carrying credit card debt is very costly, not only because you have to pay all of the interest charges, but also because your future income is committed to paying for your past purchases. Reducing your credit card debt allows you to keep more of your income, in addition to increasing your credit score and making it easier for you to borrow at low interest rates when you need to in the future.

Stop Using Cards

Nothing you do to pay down your credit card balances will help if you are adding more charges to the card each month than you pay off. Take your credit cards out of your wallet and commit to use only debit cards, checks and cash for purchases. If you cannot afford something right now, don't buy it.

Lower Interest Rates

Call each of your credit card companies and ask for a lower interest rate. Getting a lower rate causes more of your monthly payment to go toward actually paying down your balance instead of paying finance charges. Often companies will lower your rate by at least a percent or two if you ask, especially if you mention you're considering transferring the balance to a card with a lower rate.

Automate Minimum Payments

Late fees cost you money that you could be using to reduce your debt. To avoid getting hit with fees, set up automatic minimum payments from your checking account to each of your credit cards each month. This also saves you time because you don't have to make each of your payments individually.

Trim Your Spending

You will reduce your credit card balances faster if you pay more than the minimum each month. To do this, cut your spending in other areas of your budget. Choose a luxury item and commit to give it up and use all of that money for paying off debt. Options include unnecessary clothing purchases, lattes, eating out at restaurants, premium cable, alcohol, books, movies or going to live entertainment events.

Make Extra Payments

Every month, make an extra payment on the credit card with the highest interest rate. The larger the extra payment, the faster you will pay off that credit card. Applying the payment to the card with the highest interest rate maximizes your efforts because you are reducing the amount of interest you pay each month.

Use Windfalls

When you get a windfall, such as a bonus at work, tax refund or cash gift, apply that as an extra payment on your credit card. You probably weren't expecting the money anyway, so you aren't really losing anything. If you can't bear to part with it, keep a small percentage, maybe 10 percent, and use it to buy yourself something that will keep you motivated.

Track Your Progress

Help yourself see what you have accomplished by keeping track of your dwindling balances on the credit cards. Make a log and list your total amount of remaining debt each month or each quarter, depending on how frequently you need to see progress. This can help motivate you to continue.

Race a Friend

Trimming your budget and paying money you don't have to on your credit cards is a lot more fun when you do it with a friend. If you are competitive-minded, make it a game to see who can put more of his income toward paying off debt or who can get out of debt first. Check in regularly to report progress and maybe share some of the best strategies you have found.

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Tips on how to manage money to get out of debt

Most people has a small amount of debt, which generally is manageable, however debt can very quickly get out of hand and becomes self-generating. It is not the amount of debt that is important rather the ability to manage it and pay it back. There are some basic steps that can be followed to manage money and get out of debt:

*Do some financial housekeeping – there is no point in going into denial, go through all papers, bills, accounts etc and get a clear picture of exactly how much is owed. Only when the actual figure is calculated can the debt be managed;

*Stop spending on non-essentials and ensure all essential payments such as mortgage or rent are covered;

*Draw up a budget, perhaps complete a statement of affairs looking at all incoming finances and all outgoings, this will help identify all non-essential spend that can be stopped;

>Is the debt personal debt or other liability such as business debt, separate the personal debt from the business debt and address both separately, perhaps with an accountant or advisor for the business debt;

*Unburden, if possible, share the responsibility with a partner or loved one, talk about the debt, this will help with recognising the problem and enable the debt to be addressed in a practical manner;

*When all debt has been identified speak to the individual financial institutions concerned such as bank, credit card company, finance company, it might be best to get help with this form a third party such as a debt advice charity;

*Seek advice from a debt advisory charity, but never pay for this information, there are numerous charitable organisations that can help with debt management and financial planning;

*If the debt is small and can be repaid set up a realistic payment plan and advise the respective creditor;

*Take small steps, such as get a second job, or realise some assets, perhaps shares or investments or even insurance policies; and

*Be practical and realistic, set a budget that is manageable and meaningful, allow for everyday living and the occasional treat, when things become forbidden they become more desirable.

Debt can take over an individual’s life but it must be put into perspective and can be managed through small but consistent actions. Recognising the problem and identifying the issues will help to contain and address the problem. There is no debt that cannot be managed and asking for advice and help with make things easier, get the head out of the sand and be honest and actions can be taken to manage money and reduce debt.

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The Overspend Gets Bigger

See you at the airport

So what do we make of the budget?

Given his starting point, George did a reasonable juggling job, and managed to sound as if he's serious about getting the economy moving again. His moves on company taxation and fuel duty are welcome, if relatively small... er... beer. His fresh attempt to inject life into the housing market is also potentially helpful, although we need to see more detail before we can be sure it won't simply re-inflate the property bubble and/or expose taxpayers to a huge Freddie and Fannie style default crisis. 

However, looking at the big picture, he failed once again to tackle the rampaging elephant that's still smashing up the fiscal room. That is, he did nothing to bring government spending back down into line with sustainable tax revenues.

Yesterday I took part in a TPA/IEA panel discussion on the budget, and the excessive level of public spending was by far the main concern for both panellists and audience. Unfortunately, nobody could see the current government gripping it this side of the 2015 election, and a Miliband government - with or without the Lib Dems - won't even try. 

By the end of the session I was ready to book a one-way ticket to... well, to where exactly? Cyprus would now appear to be out, and Mrs D's arachnophobia rules out the more exotic destinations. Must get back to researching it.

The following is a summary of my own presentation (some bits are updates of recent blog posts, and I'm afraid there are quite a lot of numbers).

As the Chancellor highlighted in his speech, government departments have been significantly underspending against their original budget allocations. The underspend for 2012-13 is now put at £11 billion, an unprecedented shortfall which has narrowly prevented this year's borrowing increasing above last year's (£120.9bn vs £121.0bn). However, of much more significance is the continuing overspend against the government's revenue base, a problem he did not address in the budget.

The Coalition's first budget in June 2010 set out a path for public spending that saw it rise from £669bn in 2009-10 to £757bn in 2015-16, an increase of 13%. Given the urgent need for fiscal consolidation, many commentators - including the TPA - thought that not nearly tough enough. However, it was justified on the basis that economic recovery would boost revenues and close the deficit, just as it had done after the recessions of the early 1980s and 1990s.

Unfortunately, that hasn't happened. Growth has been feeble, and the economy is now (2012-13) 4% smaller than it was forecast to be back in 2010. Worse, according to the OBR's latest forecasts, the shortfall is expected to go on getting bigger, reaching 7% in real terms, and 9% in cash terms, by 2015-16. Over the whole of this Parliament (2010-11 to 2015-16), the OBR now reckons the economy will grow by just 6%, compared to its June 2010 forecast of 14%.

Relative to our economy and its capacity to bear taxation, government overspending is even worse than it appeared in June 2010.

Spending still planned to increase

The following chart shows spending in cash terms (Total Managed Expenditure - TME) since the start of Labour's reckless spending surge. As we know, that surge more than doubled spending in cash terms and even in real terms increased it by one-half. From 2009-10, it compares three plans:

• Labour's final plan
• The Coalition's first plan - June 2010
• The Coalition's latest plan - March 2013 

Key points to note:

• All three plans incorporate a sharp slow-down in growth from the surge years, but there's not a huge difference between them. 
• Spending in 2013-14 is now planned to be £720bn - almost exactly in line with the £722bn "spending envelope" set out in June 2010. Which in the narrow terms of public spending control is pretty precise management, and much better than most previous governments have managed.
• However...

...because economic growth and revenue have both fallen well below what had been expected, as a percentage of GDP spending has turned out higher than planned, and revenue much lower. Spending is now running at 45% of GDP, a mere two percentage points lower than what the Coalition inherited back in 2010. Revenue will once again fall well short of spending, at 38% of GDP, leaving government borrowing an unsustainable 7%.

Spending already far too high

The following chart puts the budget spending and revenue forecasts into context, again showing the entire period from 2000-01 through to 2017-18. The gap between the two lines represents government borrowing.

Key points to note:

• Since the privatisation of Britain's big nationalised industries (which removed a large chunk of trading profits from public sector revenues), no government has managed to raise revenues of more than about 38% of GDP: that seems to be the limit on what is politically acceptable and economically sustainable. 
• The public spending envelope remains substantially oversized relative to sustainable revenue. 
• The projected convergence of spending and revenue over the next five years depends crucially on the OBR's growth forecast being realised. 

The OBR is forecasting average growth over the next five years of 2.1% pa. Given recent growth performance, the continuing problems in Europe, our broken banks, and high energy prices, that may well turn out to be optimistic. If so, the convergence of spending and revenue may not happen at all.

Return to the 70s? 

For example, if instead of 2.1% pa growth, we get a prolonged period of 0.5% pa 1970s style growth, the gap remains stuck at 7% of GDP*. All of which will have to be borrowed.

In its first three years the Coalition has already increased the official government debt (PSND) by well over £400bn. By 2017-18, even on the OBR's forecasts, their increase will be nearly £900bn - more than doubling the debt total they inherited. And the official debt is only one small part of the government's overall liabilities.

Debt piled on debt

According the Office for National Statistics, the government's overall liabilities amount to well over £7 trillion, equivalent to five times GDP. The following chart shows the main components:

Interest on the official national debt is currently running just under £50bn pa. The OBR now forecasts it will increase to over £70bn by 2017-18. 

However, all of the government's liabilities require servicing, and if we add in those public and state pensions payments, along with PFI payments, total debt servicing is already running at £170bn pa, and is set to increase to £220bn by 2017-18. 

That means that by 2017-18, over 30% of government revenues will be earmarked to service past liabilities rather than to pay for current services.

Public spending that doesn't add up

With an increasingly large chunk of public spending earmarked for debt servicing, and NHS, Schools, and Aid spending protected inside their preposterous ring-fence, only around one-third of the spending is available for cuts. Nobody has a clue how that can be done inside George's existing spending envelope, including George himself. 

If we don't get a big shot of growth soon, we are facing a massive spending crunch. Forget public sector pay and benefit freezes: we are talking Irish-style 15% across the board cuts for everything. 

*Note I have calculated the impact of lower growth on the public finances using the OBR's own ready reckoner. It's almost identical to the old Treasury rule of thumb blogged here, and it says that a one percentage point shortfall in GDP raises public sector borrowing by 0.7% of GDP after two years. That comprises 0.5 percentage points on the spending ratio, and 0.2 percentage points off the revenue ratio.

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Doomsday Deferred

Maybe we can stay lucky

BOM has always been concerned about the rising burden of government debt interest, and we've blogged it many times. But we must admit that so far, it has not been quite the problem we feared. In fact, in the two years since we clocked off, official debt interest has only increased by £4bn pa - a surprisingly small sum when set against annual borrowing of £100bn plus.

The reason of course is that for the last five years government borrowing costs - gilt yields - have remained at historically very low levels. Right now, the yield on ten-year gilts is back below 2%, which means new borrowing is cheap, and refinancing old maturing gilts with much higher yields actually cuts overall debt interest payments. So the doomsday machine has remained quietly dormant, at least for taxpayers (although savers and retirees taking out annuities have suffered grievously from low interest rates).

However, nobody should assume this situation will last for another five years.

For one thing, the Bank of England will not go on buying up the government's debt indefinitely. The bulk of its £375bn Quantitative Easing asset purchases have been government debt, and when the QE programme ends, so will the purchases. At a stroke, one of the main factors holding down gilt yields will be removed.

Second, all around the world central banks are pumping money into their sickly economies. So far inflation has been quiescent, but the lesson of history is that sooner or later, open money sluices overflow into raging inflation. Bond investors head for the hills, bond prices sink and yields surge. There's no good reason to think this time will be any different.

True, the official debt interest projections do not incorporate this doomsday outlook. They assume that gilt yields will rise gradually to just 3.4% by 2017-18. But they also tell us that every one percentage point above their base assumption adds another £8bn pa to debt interest by the end of the period. So even if yields merely returned to their average during the decade immediately before the Crash, it would add £12-15bn to annual debt interest. And if inflation does take off, yields will go a lot higher.

There's a further point, one we have also blogged many times: the official measure of debt is a serious understatement of the Real National Debt. Among other things, the official debt figures ignore the government's pension obligations - both to public employees and state pensioners - and PFI. Which means that to get a true measure of debt servicing we need to add on to the cost of debt interest, the annual costs of servicing those obligations. Which is what we've done in the following chart (all figures taken from latest OBR, DWP, and HMT projections):

What we're saying here is that by 2017-18, payments in respect of the government's past debt obligations will amount to £200bn pa. Which means that getting on for one-third of everything taxpayers hand over is going to service debt. The amount left over for everything else - health, education, defence, law and order, and all - will be severely squeezed.

Doomsday may have been deferred, but even without the likely blow-out in the gilt market, servicing the government's debts is set to make life increasingly difficult.

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Facing Up To The Doomsday Machine

So what have we learned from today's autumn fiscal report from the Office for Budget Responsibility?

First, the OBR under Chote still thinks George is on track to deliver what he promised in June:

"Our best judgement is that the Government has a better than 50 per cent chance of meeting its mandate for a cyclically-adjusted current budget balance in 2015–16 and of achieving its supplementary target of seeing public sector net debt fall between 2014–15 and 2015–16."

Spot that "better than a 50% chance"? To listen to Will Hutton and the BBC's other "neutral commentators" you'd think the OBR had said "less than 50% chance". The fact is that despite everything previous Chancellors have promised, there are never any certainties in fiscal forecasting. "Better than 50%" really does mean George is on track.

Indeed, on the OBR's forecasts, things could well turn out better, because they reckon the downside risks to growth - the ones stressed by the BBC - are evenly balanced by the upside "risks". That is, growth could turn out higher than the central forecast, boosting tax revenues and cutting welfare payments. The OBR thinks there's a 1-in-3 chance that the government will actually be in surplus (ie repaying debt) by 2015-16:

As for the OBR report itself, it's in a different league from anything HM Treasury has previously published. It provides much more detail on the underlying assumptions, and for the first time gives some chapter and verse on BOM's old friend the Doomsday Machine (aka the risk that debt interest payments grow faster than the government's ability to finance them out of current revenues).

On that, the headline message - trumpeted by everyone from the Chancellor down - is encouraging. It is that debt interest payments are now expected to be lower than forecast in June - £18.6bn lower over the forecast period as a whole (2010-11 to 2015-16). So that's definitely good.

But we shouldn't get carried away. Debt interest still increases from £43bn this year to £63bn by 2015-16. Moreover, the OBR lifts the lid on the underlying drivers of its debt interest projection. And there we discover that what's driving the reduction in costs is not some big cut in borrowing, but a cut in the assumed interest rate the government will have to pay.

Here's the OBR's chart comparing June and November's assumptions on the average interest rate HMG will have to pay on the majority of its new bond issues (so-called conventional gilts):

As we can see, November's assumed rate is lower throughout the forecast period (by an average 0.24%). And it's the assumed lower rates that drive the bulk of the saving.

Now those lower rates reflect what has happened in the gilt market since June, so fair enough. Especially since George can argue that it's his "tough choices" that have given the market confidence to cut his borrowing rate.

But as we all know, rates that go down can also go up - especially if the market gets the jitters on inflation. So what happens then?

Again, the OBR report tells us. It includes a handy ready reckoner (Table 4.20) that shows what happens if the interest rate on gilts increases by 1% from what has been assumed. An it's not pretty - a 1% increase throughout would add £15bn to debt interest costs (and although we can't quite tell from the OBR table, with higher gilt yields there would almost certainly be other associated increases, reflecting for example, higher interest rates on National Savings).

One of the most interesting sections is on the long-term fiscal outlook, where an unchecked Doomsday Machine at full revs can do some real damage.

The key long-term issue is one we've blogged many times - too many old people, and not enough workers to support and look after them. The healthcare and pension costs of the old people increases inexorably, the tax revenues generated by the young fail to keep pace, and government borrowing goes through the roof.

The OBR has cranked some numbers looking out to mid-century showing how this could impact public sector debt. It reckons that even if all future governments maintain the same degree of fiscal restraint as George (a highly unlikely proposition given past experience), the cost of all those old people will push debt up to 100% of GDP by 2050:

But concerning though it is, that projection almost certainly understates the problem. Not only does it exclude all those off-balance sheet Enron debts, but others have projected much higher debts by mid-century (eg the Bank for International Settlements recently projected UK official public debt at 550% of GDP by 2050 - see this blog).

This is a serious problem - and Tyler speaks as one who will be part of that problem. Something will have to be done, and none of the options are going to be popular.

The OBR says it is taking a much closer look and will be reporting back next year. We very much hope that they give it to us straight - much straighter than the "fiscal sustainability" reports the Treasury have issued in the past, which have basically made out everything's fine.

Minds need to be concentrated on Doomsday.

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Just How Scared Should We Be?

Sorry kitty

Could it happen here? When the markets have finished their sport with Ireland, Portugal, Spain, etc, will they turn on us?

Let's compare our situation with Ireland's.

Both of us have governments that are currently borrowing far too much. Theirs is a bit worse than ours, but setting aside this year's extra binge to bail-out their banks (equivalent to an eye-watering 20% of GDP), they're not that much worse. According to the OECD, even before today's emergency cuts, they were already planning to cut their borrowing to 7.4% of GDP by 2012. Which compares to the 6.5% planned by George.

Both of us have governments that went into the Crash spending unsustainable tax revenues built on unsustainable debt-fueled booms. And both of us have governments that were already carrying far too much debt when the crisis broke - in fact at end-2008, HMG's debt at 57% of GDP was actually higher than Ireland's 48%.

But the most worrying parallel is that both of us have governments that have written open guarantees for banking systems that are big enough to take us all down.

The key risk - as we've blogged many times - is that the banks' assets may well be worth a lot less than it says on the tin. Everybody is now acutely aware of that possibility, so without a taxpayer guarantee (implicit though it may be), any of the banks could face a run on their deposits and other sources of funds at any time. Which would break them. And quite possibly us as well.

But as we've just seen with Ireland, taxpayer guarantees only work if the markets retain confidence in the government's ability to deliver on those guarantees. And when you have taxpayers guaranteeing bank debts that are a multiple of their own incomes, that confidence is not something anyone should depend on for very long.

You see, a key point to remember is that the very same taxpayers who are having to service the government's debts, and guarantee the banks' debts, are also having to service their own personal debts as well. Which is one hellavalotta debt.

One widely used measure of overall indebtedness is an economy's total gross external debt - ie all the debt owed by all domestic entities to foreigners.

When last sighted (June 2010), Ireland's gross external debt was $2.1 trillion. Now, that is a serious liability. It is getting on for 10 times Ireland's annual income. It's like you having a mortgage of ten times your income secured on a row of unfinished estate houses in the middle of a peat bog.

And our own external debt?

Well, actually it's only $9 trillion. Which comes in at a "mere" 4 times our annual income.

Phew. We can all relax.

Er, nooooo.

Ireland may be in much worse shape than us, but compared to our major league competitors we are still in pretty bad shape. Germany's external debt stands at 1.4 times annual income, and the US is on less than one times. Japan - the country that people are always telling us has much more debt than us - is on less than 0.5 times.

Even more shocking, we are in worse shape than either Portugal or Spain - the two piigy countries now in the market firing line.

Here's the chart:

And that's why we can't relax. We may be in better shape than the Irish, but compared to other major economies we are right out on the thin ice.

True, we're not in the Euro, so we're not completely stuffed (as today's encouraging export news underlines).

But we can't devalue our way out of this debt for one very simple reason - a large chunk of it is foreign currency debt (eg see this blog).

How scared should we be?

It's at least an 8.

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Is Default Now The Only Real Option?

Seemed like a lovely idea at the time... but who was going to pay?

As we've blogged many times, our real National Debt is far bigger than the government officially acknowledges. When we calculated the real debt for the TPA this year, we estimated the true overall total at around £8 trillion, nine times the official total, and over £300,000 for every single household in Britain. Here's the picture to remind us:

Our number picked up a fair amount of flak at the time for including things that are supposedly not real debt, such as pension liabilities. We answered the criticisms here, but one particular objection is worth picking up again in the light of the Irish crisis.

Our debt figure included the gross liabilities of our nationalised banks, amounting to £2.6 trillion. And the objection was that those liabilities are backed by the banks' assets, so just looking at the liabilities is scaremongering.

There is of course some truth in that point, but we argued that taxpayers need to know our total potential exposure. Because in these uncertain times, nobody can be at all sure what the banks' assets are actually worth.

And now we have a real live example of what happens when reality bites. As we noted here, the reason George has had to accept shoring up Ireland is that our banks' have lent the Irish well over £100bn - ie we can't afford to let them go down without risking a £100bn hole in our banks' balance sheets (£80 odd billion of which would be down to the nationalised RBS and Lloyds).

So how does George's decision impact on the National Debt?

An interesting question.

If we lend the cash directly, then it will likely add to the official National Debt. But if we lend it via a guarantee on one of those baffling Euro financing facilities, it will likely not add to the official National Debt at all - it will just be counted as a contingent liability, which the government habitually ignores. Even though in the real world, we are just as fully exposed to the liability either way.

And what about our Real National Debt (RND) calculation? That already includes the full liability supposedly backed by the banks' Irish "assets", so at first blush you might conclude that all we are doing is simply swapping one liability for another. Maybe the total RND doesn't change.

Alas, while that would be the case if the Irish were using HMG's new official loan to repay their existing loan from HMG's banks, that's not what's proposed. Instead, the new loan will simply add to the existing loan, so that the Irish can go on living day-to-day for a few more months. The Real National Debt just got even bigger.

Which is just a prelude to this morning's real question.

Prompted by some fascinating emails from longtime BOM correspondent NL, Tyler has been thinking further about how we can ever hope to escape from under this humongous debt burden.

Earlier in the week we reminded ourselves of the four traditional escape routes for indebted governments, and who ends up paying:

1. Repayment - ie the government runs budget surpluses. Taxpayers pay.
2. Default - most likely in the form of a partial default via debt restructuring (aka haircuts, debt for equity conversions, or coupon conversions). Lenders pay.
3. Inflation tax - where debt is denominated in fixed money terms, governments can work off their debts by engineering inflation - effectively a gigantic stealth tax on debt holders. Lenders pay ( including anyone who has been foolish enough to save their nest egg in a building society account).
4. Growth - GDP growth is the holy grail of indebted governments. Growth makes a given amount of debt less significant relative to GDP and tax revenues with each passing year. It's a get-out-jail free card for both the borrower and the lender.

NL emailed to object:

"Growth doesn't do anything for the debts. It's a bit of linguistic trickery. The only thing that pays debts in this way is growth in taxation. Politicians don't want to admit that they have to take more and more money in order to pay debts. So they use deceipt. If we take growing taxes and turn the adjective into a noun, who can complain about growth?

So when ever you see growth, it really means we are going to take more money from you in taxation to pay off our mistakes."

And of course, NL is quite correct - "the only thing that pays debts in this way is growth in taxation". It's the growth in tax revenues that floats the government free from the fiscal rocks. Taxpayers do end up paying more.

So how can it be seen as a fiscal get-out-of-jail-free card?

Because compared to an increase tax rates, an increase in tax revenues flowing from higher growth is a lot less painful for most people. They may be paying more tax in money terms, but relative to their incomes it will probably be less - the burden will feel lighter.

We can think of it in the same vein as the increase in tax revenues that we've often seen following cuts in tax rates, For example, when the Thatcher government cut the top rate of income tax, revenue from top rate taxpayers actually increased. And indeed Tyler believes cuts in tax rates now would generate actual increases in tax revenues within a very short period (eg we should cut the new top 50p income tax rate soonest).

But NL is not so easily convinced, and responded:

"There is also the other little calculation.

Lets take a million unemployed. 13K a year in benefits. They all get minimum wage jobs, so they pay 2.5K a year in taxes. However they will still get housing benefits. That's 5K a year. All relatively round numbers. Net increases in taxation / reduction in benefits comes to 13 - 5 - 2.5 = 5.5K per person.

So for each million that gives 5.5 billion. Even getting all those not in work, back to work, isn't going to close the deficit."

Tyler loves practical calculations like this - they really bring things into focus.

Let's take NL's assumptions as correct, although we reckon his arithmentic needs tweaking (ie by getting these unemployed back to work the government saves £8k pa in benefits - £13k minus £5k HB - plus it gets an extra £2.5k in tax revenue, equals £10.5k total improvement in the fiscal position). The overall saving from returning one million to work is £10.5k times one million, equals £10.5bn.

And given that there are currently well over 5m adults of working age living on benefits, that would suggest we could save over £50bn pa - if we could get them all into paid employment.

Now, a £50bn pa saving is not bad, not bad at all.

Except that we'll never get all 5 million back to work. And against a Real National Debt of £7.9 trillion, even a £50bn pa saving not really all that much. At £50bn pa it would take 158 years to pay off the debt. Tyler will have long since departed. The junior Tylers will have joined him. And the as yet unhatched junior junior junior Tylers will likely have gone too.

Hmmm. Maybe growth isn't quite such a get-of-jail free card after all.

Well, what about the good old inflation tax?

Unfortunately NL is pessimistic there too:

"On the inflation front, look at the £6.9 [7.9?] trillion number for true government debts.

What percentage is linked to inflation? Almost all of it. OK the CPI to RPI change cuts 15% off the debts linked to RPI. However, even the borrowing has a lot that is RPI linked. The PFI deals have RPI kickers. (Lender can convert to RPI at their choice).

ie. It's a myth that inflation deals with government debts."

You know what? He looks horribly right there too. As we ourselves have previously noted:

"Default via inflation only really works on the government's official debt. The much bigger £4 trillion unfunded pension debts will be trickier to deal with, since most of the pension payments are formally linked to the inflation index - higher inflation simply means higher payments."

So that's £4 trillion of the indexed pension debt, plus a quarter trillion of index-linked gilts, plus those largely indexed PFI contracts. Which means well over half our Real National Debt cannot be inflated away.

Uggh.

So what were those other two escape routes again?

Ah yes, repayment - that must be it.

Except, hang on - that's not an escape route at all. That's just the harsh cold turkey of taxpayers handing over more in taxes than they get in public services for years. Years and years and YEARS. The Tylers, the junior Tylers, the junior junior junior Tylers, everybody. Yea, even unto the nth generation.

Wait. The Major - who has been reading this over Tyler's shoulder - has just loaded his service revolver and wandered off alone into the woods. Surely things can't be this bad!

Well, there is one other final escape route left - default.

And the more you think about it, the more you realise that default is now pretty well inevitable.

And here's how it will work.

First, and most important, HMG has to step back from those £4 trillion of pension liabilities. Yes, they are liabilities to actual and future public sector and state pensioners that have already been incurred against past pension contributions and service. And yes, HMG has made solemn promises.

But the plain fact is that taxpayers can't afford to honour those promises. The pension age must be raised to at least 70 right across the state and public sector board right now. Either that, or the indexation promise must be abandoned, which would be much less fair on the real elderly.

Second, HMG needs to restructure the banks soonest, split wholesale and retail banking (as blogged many times), and withdraw from all guarantees explicit or implicit on the banks' wholesale liabilities. RBS and Lloyds should be split and flogged off pronto. Yes, the banks' shareholders and wholesale creditors will scream, but that's too bad.

The inflation tax? Well, as we've blogged before, we fear that's already out of the traps, and doubtless it will play its usual part in eroding the real value of HMG's unindexed fixed money debt.

And despite what we've said above, we still think growth will help by generating higher tax revenues from given tax rates.

But when you sit down and do some arithmetic, it does look horribly like default is the only real way of cutting the debt as much as it needs to be cut. Default on all those grandiose pension promises made by successive generations of politicos since Lloyd George launched the state pension one hundred years ago.

Never ever trust politicians who claim they can give you something for nothing. Try to remember that in future.

PS And here's how it looks from Dublin:

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Whose Debts Will We Take Over Next?

PIIGS stuffing

It sounds like George has buckled and that we're now in for £7bn of the Irish bail-out:

“Ireland is our closest neighbour. And it's in Britain's national interest that the Irish economy is successful and we have a stable banking system. Britain stands ready to support Ireland.”

Did he have a choice?

In the circs, probably not.

Take a look at the handy chart above. It's taken from last week's IMF report on the UK economy, and it shows UK banks' exposure (aka loans) to Ireland along with their exposure to three of the other PIIGS. As we can see, they are in for well over £100bn to the Emerald Isle, and getting on for £300bn to the group as a whole (ex Italy).

In theory of course, we should be able to say to the banks, that's your problem mate - you lent the money on all those housing estates in the peat bogs, now you can reap the rewards.

But in practice, we're stuffed. Post-Crock, we rediscovered the fact that taxpayers have to protect retail bank depositors here at home. And that means guaranteeing retail banks. Which as things stand, means guaranteeing all UK banks.

But let's hope George is at least insisting on some pretty tough conditions - no backsliding on spending cuts and close IMF monitoring.

We've only got to look at Greece to understand what could lie ahead in Ireland. Their existing government is going down, and its successors will look for every opportunity to backtrack and obfuscate. We must not accept that.

Who's next?

Well, as the chart shows, UK banks have chunky exposure to Spain, and if you're going to do Spain you might as well chuck in Portugal. We Northern Europeans will soon be on the hook for the whole lot.

It doesn't bear thinking about, but here's a small suggestion - when it comes to the crunch (ie outright default) HMG should do a debt for villas swap. Hard-pressed UK taxpayers could then be offered cheap villa holidays in the sun to take their minds off their 70% tax rates.

Apart from that, Tyler can see no light in the Euro-gloom.

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The Real Question - Who Pays?

A seriously bum rap

Here's what's supposed to happen: you borrow some money, and then you repay it. And the emphasis is on the word "you".

Now, what's so hard about that? The practice has been around for centuries, and nobody can honestly claim ignorance of the rules.

Yet somehow, when borrowers decide they can't make their repayments, it's rarely seen as their fault. Instead, the blame is landed on the lender, either for making it too easy to borrow in the first place, or for demanding repayment in times of difficulty. Tyler has never thought it fair that poor old Shylock loses his ducats because some smart-ass amateur lawyer gets the borrower off on a technicality, especially when Shylock would still have had to honour his own debts to his depositors. But you're meant to cheer.

And so to the current Irish crisis.

The Irish have borrowed A Lot of money. Their citizens borrowed a lot to buy property, their government borrowed a lot to... ummm... spend, and their banks borrowed a lot to punt around, largely on property loans. Their external debt is now a staggering 1300% of GDP, most of it now effectively nationalised through the government formally guaranteeing its banks' debts.

Here's how it ramped up during the go-go years to reach its current €1.74 trillion (chart is in millions of Euros, taken from the highly informative Ireland After NAMA):

So who's to blame?

Well, yes, the Irish of course. For borrowing so much. Obvious.

But Tyler is just listening to J Humphrys summarising the situation for BBC R4 Today: "...the vultures are circling Ireland... the country may be forced to hold out the begging bowl... the vultures may then turn their rapacious attention elsewhere..."

Those greedy flesh-ripping lenders - why does anyone put up with them?

But what's the real question beyond the tabloid emotion? The real question - as we all surely understand by now - is who's going to pay? Not just for Ireland's debts, but for Greece, Portugal, Spain, Italy, etc etc.

As regular BOM readers may recall from this blog, traditionally there have only ever been four options for governments with too much debt. Let's review them to see who actually ends up paying:

1. Repayment - ie the government runs budget surpluses. Taxpayers pay.
2. Default - most likely in the form of a partial default via debt restructuring (aka haircuts, debt for equity conversions, or coupon conversions). Lenders pay. 
3. Inflation tax - where debt is denominated in fixed money terms (as most is), governments can work off their debts by engineering inflation - effectively a gigantic stealth tax on debt holders. Lenders pay, including anyone who has been foolish enough to save their nest egg in a building society account.
4. Growth - GDP growth is the holy grail of indebted governments. Growth makes a given amount of debt less significant relative to GDP and tax revenues with each passing year. It's a get-out-jail free card for both the borrower and the lender.

But this is where Ireland and the others have a problem. Because they're members of the Euro, and that pretty well nukes options 3 and 4. As everyone in the real world always understood, the Euro makes it impossible for individual members to crank their own printing presses. Ireland and the others can't impose an inflation tax, and can't depreciate their currencies to stimulate growth - they're locked in.

Which means the only options are either to repay - whatever the tax and spending implications - or to default.

Now, the average Irish/Greek/Portuguese/Spanish citizen is going to opt for default - no question. But sadly, the lenders aren't nearly so keen. And since the lenders largely comprise banks based in other member states of the EU (including Britain), those members are not keen either.

Which is why Ireland and the others' membership of the Euro has brought a fifth option into play - transfer the debt to taxpayers in other countries.

And that's precisely what is being done with the EU's €750bn bail-out package, agreed during the Greek crisis in May. Taxpayers elsewhere are being forced to guarantee up to €750bn of loans to basket cases like Ireland.

Fortunately, the UK's share of these guarantees is limited, because - thank God - we aren't members of the Euro (keeping us out was one of only two useful things G Brown ever achieved). But even so, it could still be well over £10bn (including both our €8bn share of the European Financial Stabilisation Mechanism and our €4bn share of increased IMF lending).

But spare a thought for the German taxpayer. They've always run a tight Lutheran ship in terms of their own borrowing, but now they're being called upon to guarantee tens of billions of Euros in loans to the wild free spending PIIGS. And they will note that the EU's announced €750bn bail-out fund only covers a fraction of the total external debt of the PIIGS, which comes in at over €5 trillion.

Of course, at the level of the entire Eurozone, there IS an alternative. As several commentators have argued over the last few days, the European Central Bank could fire up the presses. It could flood the world with Euros just as the Fed is flooding the world with dollars. It could do so until Euro inflation - currently around 2% - takes off.

But if you're a normal everyday punter in Germany, why would you feel any better about that? You almost certainly never wanted the Euro in the first place, and went along with it only because you were assured it would be the rock solid Deutschemark by another name. How are you going to react when your Euro savings are obliterated simply to shore up the PIIGS?

At the end of the day, a bout of Euro inflation looks increasingly likely - all the other options are simply too hard for Europe's rulers to swallow. German taxpayers are going to be left feeling just like these American furry animals feel about the Fed's antics on the dollar printing press (HTP JWK):



PS If by any slight chance anyone is reading this thinking the inflation storm won't affect us, today's re-acceleration of UK inflation to 3.2% - above market expectations - is an excellent reminder of reality.

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Britain's Trillion Pound Horror Story

Durkin's the one on the left... physically, that is

Essential viewing at 9pm tonight on C4.

The latest film by Martin "Great Climate Warming Swindle" Durkin is on one of BOM's core subjects - our huge national debt.

It's called Britain's Trillion Pound Horror Story, and the blurb says:

"Film maker Martin Durkin explains the full extent of the financial mess we are in: an estimated £4.8 trillion of national debt and counting. It's so big that even if every home in the UK was sold it wouldn't raise enough cash to pay it off.

Durkin argues that to put Britain back on track we need to radically rethink the role of the state, stop politicians spending money in our name and introduce, among other measures, flat taxes to make Britain's economy boom again."

If it's anything like Durkin's climate film, it should be a rattling good view.

And yes, congratulations to C4 for giving us a rare prime time chance to hear just why we must stop politicians spending money in our name. Can't imagine the BBC ever doing that.

PS I presume we are going to have proper prosecutions and punishment for the screaming rabble who smashed up Millbank yesterday. We have stacks of video, and identification looks pretty straightforward. So no wimping - we need proper action against these people, including an end to any further taxpayer support for those convicted. We cannot have taxpayers robbed by violent mobs, and we need to make that clear right now.

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www.gudanggrosiran.com Categories: debt

Why The Real National Debt Is Real

Last week we published our estimate of the Real National Debt, putting it at a very scary £7.9 trillion, or around £300,000 for every British family.

Since then a number of people have dismissed our figure as grossly misleading, and accused us of scaremongering. So let's just run through some of the objections and see what we think.

1. Our nationalised banks have assets as well as liabilities

£2.6 trillion of our debt figure comprises the liabilities of our two big nationalised banks, RBS and Lloyds. The objection is that we have ignored their assets, and therefore hugely over-egged taxpayer exposure.

On one level, that's true. The banks do have huge assets to set against their liabilities, as is fully acknowledged in our research paper.

But the problem is that nobody - including the banks themselves - knows what those assets are actually worth. Whereas the liabilities are now hanging round taxpayers' necks in their entirety.

The final outcome - in terms of our eventual net loss - is anyone's guess. True, most loss estimates are much lower than the entire liability (as noted in our paper), but nobody actually knows. And given the events of the last two years, we believe it's prudent to understand our potential total liability.

Moreover, even if we were to set aside the entire liabilities of RBS and Lloyds as being in some sense temporary, our estimate of the Real National Debt would still stand at £5.3 trillion, or more than £200,000 for every family.

2. Governments have assets as well as liabilities

The second objection is that even this lower figure hugely overstates the debt, because the government itself also has huge assets.

Again, there is some truth in this. According to official estimates, the public sector as a whole has assets of getting on for £1 trillion (see this excellent ONS article for a summary of the official stats).

But we need to understand a couple of things about these assets.

To start with, they mainly comprise specialised physical assets like motorways and hospitals. And such assets are not readily realisable (ie they are not liquid).

Moreover, even if HMG could sell them, much of their assumed value depends on having someone who wants to use a motorway or a hospital and is prepared to pay for the privilege. Their value purely as building plots or agricultural land would be very much less.

Consider who would pay to use a British hospital. Yes, you guessed it - British hospital patients. The hospital's value to a prospective purchaser largely depends on his being able to charge patients for its use, and patients being prepared to pay.

Except in Britain, as things stand, it's not the patient who pays, but the NHS. Or to put it another way, the government could almost certainly sell its hospitals to reduce the debt burden on taxpayers. But only at the cost of the NHS then having to pay a fee to use those very same hospitals. The net effect - the net burden on taxpayers - remains pretty much the same. The only real difference is that yet another chunk of government debt has been shuffled off balance sheet (cf PFI).

3. We are ignoring the government's future tax receipts

This objection says that we shouldn't get fixated on the government's liability to make future payments while ignoring its future receipts of tax revenues. Our analysis is one-sided and a grossly misleading statement of the true fiscal position.

Hmm.

Let's remind ourselves what our Real National Debt calculation is actually looking at.

It's looking at the government's commitment to make future payments in respect of loans or services it has received in the past. Which is the standard and essential definition of debt (see paper).

Thus for example, we include the government's £1.3 trillion accrued liability to make public sector pensions payments. That relates solely to the service and pension contributions of public sector employees in the past - the pension entitlement they have earned so far. What we are saying is that public employees have provided services and loans (their contributions) to the government that they expect to be repaid during their retirement. It is debt, pure and simple.

Similarly, we include the £2.7 trillion liability to make state pension payments. Again, that reflects the accrued liability in respect of National Insurance Contributions already made in the past against pensions to be paid by the government in the future. It is an undischarged loan to the government.

The Real National Debt adds together all these undischarged liabilities that have accrued over the past and tells us where we currently stand overall.

Yes, of course the government will have future tax revenues to draw on in order to meet its debt obligations. Of course. But the greater the debt obligation in respect of past service and loans, the less of those future tax revenues there'll be left over to pay for future services.

Even today, 28% of the government's tax revenues - more than one pound in every four - goes to service these past debts. Two years ago it was just 24%, and the proportion is growing fast (see this blog).

And that's the key point. The massive growth in these obligations from the past is placing a huge strain on the government's ability to fund services in the future.

Sure, the government has revenue raising powers and can always raise future taxes. But that is precisely why taxpayers should be so concerned at the size of the Real National Debt. Unless we recognise and address the full range of government liabilities, taxpayers face a grim future of rising taxes alongside worse public services.

4. The government could always renege on its pension obligations

Since the government can legislate black is white (subject to EU directives), it could simply renege on its pension liabilities, both public sector and state. So things aren't nearly as bad as the TPA make out.

This is quite a popular objection to our calculation, and it must be said that governments across the world are currently embarked on just such schemes.

But we should understand it is no easy option. Quite apart from the moral question raised by robbing defenceless pensioners, events in France and Greece highlight the political difficulty of making substantial changes to existing entitlements. The losers are very obvious, and in the case of public sector workers, highly unionised. It takes a strong government to face down strike-bound public services and street riots.

Of course, it is easier to make changes to future entitlements - by for example gradually increasing the pension age - and our government must do that. Increasing life expectancy means that we must move the pension age up to at least 70 (as Lord Turner has suggested). But that doesn't help much with the existing accrued liability - the liability we include in our calculation.

And that liability is real, not merely some distant entry in an accounting ledger to be left for our grandchildren. It is here with us now, requiring ever greater payments with each year that passes. Two years ago, the cost of public sector and state pensions was £83bn, this year it's £95bn, and growing fast.

Conclusion

The TPA's calculation of the Real National Debt is designed to show the full extent of the liabilities now bearing down on taxpayers' shoulders. And those liabilities arise from loans and services supplied to government in the past: they are not related to services the government may or may not provide in the future.

Yes, there are assets on the other side of the balance sheet, but even on the most optimistic interpretation they cover well under half the debt.

And yes, there are future tax revenues to service the liabilities. But that servicing already consumes more than one-quarter of tax revenue and the proportion is growing. Taxes could certainly be raised, but that is the very reason taxpayers need to be concerned about the huge size of this debt.

As for reneging on the debt - especially the pension debt - that has been an option for desperate governments throughout the ages. But it is not the easy low-pain option often suggested.

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www.gudanggrosiran.com Categories: debt

Deeper - Much Deeper - In Debt

Scary

Tyler's long-promised report on the Real National Debt has finally made it to publication (download here and see TPA blog here). As BOM readers will know, the Real National Debt is the debt including all those off-balance sheet Enron items like public sector pensions, and the key points as follows:

• At the end of 2009-10 the real national debt stood at £7.9 trillion, over £300,000 for every single household in Britain
• During the last decade debt has more than tripled, soaring from 230 per cent of GDP (£2.3 trillion) up to 560 per cent of GDP (£7.9 trillion)
• Official national debt (quoted by the Chancellor in his budget) hugely underestimates taxpayer liabilities
• Relative to GDP this is by far the biggest national debt we have ever had since records began

And here's the summary chart with the accompanying key:

As that crotchety old guy on the accompanying vid* reminds us, it's pretty scary stuff.

Well, that is to say, you and I think it's pretty scary. Amazingly, despite the scale of these figures, there are still those who argue that we needn’t worry too much. They argue that we can take time to address the problem, something is bound to turn up when the economy recovers, and that anyway most of this debt isn’t real, like say credit card debt.

In tough times that's a very seductive line, so we need to be clear why it’s wrong.

First, these debts are much more than a few dry entries in some dusty accounting ledger. They represent a real commitment on taxpayers to make real payments in future years.

And lest anyone imagine those payments won’t come due for ages, and that we can safely shrug and leave the pain to our grandchildren, it’s important to understand that annual servicing costs are already increasing alarmingly. By the middle of this present decade the annual cost of debt interest plus pension payments plus other debt servicing will be approaching £200 billion, or £8000 per annum for every family (see this blog).

Second, although economic growth will certainly help ease the strain, the rapidly mounting cost of debt servicing means that we will need a high growth rate just to keep our heads above water. Unfortunately, from where we are today a sustained period of high growth doesn’t look very likely.

Third, pension liabilities are just as much debt as government borrowing in the bond market. For sure, the government could renege on its accumulated obligations to pensioners, just as it could default on its market debt. But there would be consequences (cf La Belle France), and the present government shows no signs of doing so. On the contrary, it has promised to re-link the basic state pension to average earnings.

Finally, while it is true that our nationalised banks have assets to back their debts, nobody can be sure quite how much those assets are actually worth. Taxpayers are effectively on the line for the full amount of the debt, and should not assume they can rely on the banks’ assets for support (as Irish taxpayers have recently discovered).

A real National Debt of six times our annual income is insupportable. It represents a mounting burden on taxpayers for years to come, and a colossal drag on future economic growth. In one way or another, government must reduce it.

Which is why Wednesday’s spending announcements are so important. We need to see a convincing plan for delivering the fiscal restraint promised in June’s Emergency Budget.

But that is only the start.

Spending needs to be held down for at least a decade, so that the annual budget deficit becomes an annual surplus, and we start to pay down the debt – we are still a long way from that.

As we've blogged many times, we need to flog our nationalised banks soonest.

And in addition, there needs to be a much more fundamental reform of government pensions, both public sector and state. With life expectancy increasing in leaps and bounds, the age at which people can draw their pension has to be increased soon, almost certainly to 70.

*Footnote. Yes, there is a vid featuring some old bloke Tyler doesn't recognise. But for the record, here it is:

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How Can We Ever Escape?

But does it go anywhere?

Tyler was asked a very good question today. He was explaining to some normal taxpayers just how big the real National Debt has now become, when one of them put her finger on something very troubling. "But surely if the debt's that big" she said, "how can we ever hope to escape?"

Tyler's immediate response was to advise emigration. But can that be right?

Let's recap a few facts.

The official gross National Debt has just broken through the £1 trillion mark, around £40,000 for every single British household.

But as regular BOM readers will know, that official figure vastly understates the government's real debts (eg see this blog). By the time you've added in unfunded public sector pensions, accrued unfunded state pension liabilities, PFI, Network Rail, etc etc, the real National Debt stands at over £5 trillion. And that's without counting the liabilities of our bailed out nationalised banks, which currently stand at around £2.5 trillion.

Now given that our entire annual GDP is only around £1.5 trillion, the government has amassed debts of 4-6 times our annual income. You try borrowing that kind of multiple from your friendly high street bank - they'd laugh at you, knowing you would never ever be able to pay it off.

And neither will the government.

Moreover, even after all the cuts that George will be announcing on 20th October, and all the accompanying screams we'll hear, he still plans for our debts to go on increasing all the way through this current parliament. By 2015-16 our official gross National Debt will have increased to from £1 trillion to £1.5 trillion, and all the hidden debts will almost certainly be higher too.

So OK, you say, we don't necessarily have to pay off the debt. Maybe we could pay the annual debt servicing costs and just sort of run with it.

Hmm.

According to George's Office for Budget Responsibility, by 2015-16 the government's debt interest payments will have surged to £67bn pa, well over double what they were last year, and a bill of over £2500 pa for every British family.

And to that you have to add the annual cost of unfunded public sector pensions - £32 bn pa by 2015-16 - payments under PFI contracts - £10bn pa by 2015-16 - and unfunded state pensions payments which weigh in at an astonishing £79bn pa by 2015-16 (BSP plus SERPS plus S2P).

Add that lot together and the government's annual servicing bill on its real debts will be running at £188bn pa by 2015-16. Which will be an annual bill of £7500 for every single family, and still rising.

So what then?

More public spending cuts?

Yes, we'll need them. But after 5 years of serious cuts, will the government (of any complexion) have the stomach for yet more?

Tax rises?

Maybe. But tax rises would dent what may still be a sluggish recovery. And tax rises to fund debt servicing costs hardly sound like a vote winner.

The miracle cure of course would be faster GDP growth, painlessly lifting tax revenue and cutting welfare related spending. Which is why the government should bust a gut to stimulate that growth, by for example, canning the 50p tax rate soonest.

But failing a growth spurt, we're left with just one option - default, the traditional escape route for failing governments throughout the ages.

Default on the government's formal debt will be quite easy. Inflation is the key, and as we know, we're already running well above the 2% pa supposedly underwritten by the Bank of England. And with all that extra money the Bank printed still sloshing around, it should remain high for a good while yet.

But default via inflation only really works on the government's official debt. The much bigger unfunded pension debts will be trickier to deal with, since most of the pension payments are formally linked to the inflation index - higher inflation simply means higher payments. Denied a stealth default, the government will have to be much braver on those debts, including a faster and greater increase in the state pension age, and a big cut in public sector pension benefits (much bigger than John Hutton was prepared to let on yesterday).

So where does that leave us?

For the government, escape requires years of spending cuts followed by years of severe restraint. At the same time it requires much bolder action to stimulate sustainable growth (ie tax cuts, especially axing the 50p rate). And unfortunately, the inflation tax looks certain to make a contribution.

For the individual... yup, emigration really does seem the only surefire escape route.

PS Didn't he do well. Longtime readers will recall our previous encounters with Red Ed's right left hand man Sadiq Kahn. Kahn has now ascended to the giddy heights of Shadow Justice Secretary, even though as Guido recounts, he carries a weight of "controversial" baggage. We first clocked him back in 2007 when as a member of the Public Accounts Committee he ate a man in a canoe.

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www.gudanggrosiran.com Categories: debt, doom