Tuesday, October 12, 2010

Spend, Spend, Spend?

"In these economic times" is becoming a ubiquitous phrase normally used in conjunction with "rationalisation". With this debt hanging over the country the answer, according to our Coalition Overlords is to cut spending. This makes sense - increase efficiency, stop spending money we don't have and reduce this £772 billion money mountain.

Okay so that's public debt, the money the country owes, what about private debt? This stands at around £1.4 trillion so the same arguments should be applied even more so; shouldn't they? Well no rather than advising its citizens to cut down on luxuries, pick up the economy versions of food, and downsize their homes etc. instead we're told we should spend as normal if not more.

The difference is that private debt generates more money - the interest you owe goes to businesses as profit, which in turn means more tax the government can grab, means more money paid to employees which in turn means more money in circulation which flows around the country more. Public debt generates nothing for us and is whisked straight out of the country. Well that's the theory.

In practice, the flow has seized up. To pay back a debt you need to charge more for goods/services, in order to afford those goods/services you need more money; so you need to charge more for goods/services. With debts being reneged on the banks are less likely to take risks and loan out money; better to just invest in the stock or currencies markets which does nothing to aid the circulation of money.

So is there still an argument to cut public spending - not really. Make it more efficient yes, but that doesn't necessarily equate to spending less. Here's an example from Wyre Forest's latest statement of accounts on page 25 we learn that the amount of income from Local Tax Collection was £8,993k, but it cost £9,691k to collect. In other words we could have saved £698k by simply not collecting taxes?

On the same page we see that Housing benefit made a profit £27,233k out with £27,319k in except the next line is Housing benefit administration £592k out £420k in. So it cost £86k to hand out benefits?

It spent £107k in Tourism, but only received £5k back. So we should stop spending on these things? No because the money is spread around - only £5k came directly back, but the boost in tourism meant shops staying open, making more money hiring more staff and paying more back to the government who passes it down to the area.

So spending cuts hurt everyone, but getting more for your money's worth helps everyone.