Sunday, 30 March 2014

2014 Are we out of the woods yet?

Over recent months we have heard a lot about our economic recovery and everyone seems to be talking up the rude health of our growth rate and future prospects. Now, I'm not someone who just likes to pour cold water on a god story, but I have to admit that I felt a bit sceptical about what I was seeing and hearing. Things don't seem be borne out by what I see around me, or by the words some economists have committed to print.

So I decided to see what I could find out and what it might tell me about what does or doesn't underpin our economic revolution. I'm no economist so I have borrowed from some friendly sites and used the graphic information available to try and build a coherent picture, allied to what I see and hear around me.

Rather than come to any clearly defined conclusion, I found that I wanted to know more. So as I travel through the graphs and the story they tell, I have highlighted what I think are some key questions that still need to be answered, if I am to be convinced that we are on the road to a sustainable recovery.

UK debt

For me, this graph is all about the underlying trend (i.e. the blue line),which indicates that public sector debt is increasing steadily. This has continued to rise as a percentage of GDP, despite the fact that numerous cuts in the public sector budget have been made. So whilst it might be reasonable to say that we are paying down some of the debt due to the cost of intervening post 2008, this really only serves to mask the underlying trend.


What interested me here was the fact that our interest repayments on debt as a % of GDP, appear to be creeping back up again. Wouldn't you expect this to be decreasing when we are told that our economy is growing and interest rates (and hence bond yields etc.) remain low. And yet, there appears to be a steady move upwards!

I may be wrong here, but I would be very concerned if government borrowing rates returned to more normal levels (rates/yields of about 4 to 5%), as the graph above would be telling me, that this percentage would be likely to increase significantly without a proportionate increase in GDP.

The graph below demonstrates this even more graphically dealing only with the debt interest payments. Did you just say wow?!!! How much tax do we have to generate to pay all of this?


So, leaving the graphs behind, how do I now feel about the state of the UK economy? I think I can sum up these feelings under three simple headings; taxation, standard of living and personal debt.

On tax, the current government always wants to reduce levels of both personal and corporate tax, to encourage both individuals and business to grow and spend more as result of keeping more of the money that they earn. The flip side to this however, is that in order to lower taxes, public spending and borrowing have to be reduced. With borrowing still worryingly high, the balance has been at the expense of sizeable cuts to public services.

This has linked very much to the issue of standard of living and the perception of how wealthy we feel. Many jobs have been lost in the public sector, predominantly they have been well paid jobs that return good tax revenues and also encourage spending in the wider economy. The loss of these jobs must have a detrimental impact on tax receipts and spending. Many of these jobs have been replaced in the private sector, however a significant number of these jobs are much lower paid and do not have such a net positive benefit to the Exchequer! In fact many of them benefit off-shore share holders and pension funds through increased profits, rather than our own interests.

It does not help to bring taxes down, when welfare has to be paid to help low earners make ends meet, in fact it is likely that this is an intractable element as to why government borrowing continues to rise! These facts probably contribute to an underlying uncertainty about the overall improvement in the economy, allied to rising prices compared to earnings and personal borrowing.

Personal borrowing in the UK is huge, about £1.4Tr, and represents a significant risk to recovery. When interest rates are low, it is not uncommon to see increased borrowing. Because however, interest rates are low to savers. it is also common for a lot of debt to be paid down. If interest rates were to start moving upwards again, there would be a risk of a lot of bad debt, which could be dangerous to the banking system.

So whilst on the face of it, there does seem to be a recovery (certainly in terms of growth and jobs), it does not have the hallmarks of being a sustainable recovery. It appears to be based upon debt and potential bubbles forming in the economy, which is a high risk strategy in my eyes.

Only time will tell, but it will be good to revisit this at a later date.