Mind Your Ps and Qs

http://www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=402980&re=9579&ea=148984&Page=1

Government debt has been soaring.

At £156.1 billion the gap between income and what the UK government spent this year is higher than in almost any other country in the world – including the southern European countries that sparked recent market worries.

Total government debt – at £893.4bn is around 62% of GDP and is widely expected to climb – possibly close to 100%.

More government money is spent on interest payments each year than is paid on the NHS or on the police.

With tax receipts falling and the cost of welfare rising, the recession has made it increasingly difficult for the UK to balance its books. 

Anyone in debt knows there is a level at which the cost of borrowing rises so high that it becomes almost impossible to bring borrowing back down.

So that’s the backdrop and that’s the state we are in.

George Osbourne is worried that the markets will go out on the attack on us in the same way that they went out on the attack on Greece. It is still possible. But we’ve got some key advantages over Greece, namely a more flexible labour market, an exchange rate that can be devalued, and debt that is due further out.

Osbourne is going to want to show the markets that he is being decisive.  He will be terrified of a downgrade. That’s why I expect some major cuts in the forthcoming budget. Some of it will be in no brainer areas (eg benefits and public sector), other parts will be in areas that will affect the middle classes. Expect to be  squeezed. Austerity, we’ve not even seen the start of it yet ……

So there we have it, the first set of cuts in government spending. George Osbourne has saved £6bn by cutting child trust funds, saving on IT projects, quangos, lower grants to local councils, back office efficiencies and some training programs.

The Independent has a very nice visual today which compares the amount that will be saved against the mountain of UK debt. The conclusion is that these cuts are relatively trifling.

Things are going to get a lot more austere than this. The first emergency budget is 4 weeks away, and then there’s the autumn spending review which will set the pattern for spending over the course of the parliament. And the government wants to be seen to be taking decisive action to avoid being attacked by the markets in the same way that Greece has been.

But how did we get to this point ? I can point to 4 key things that have pushed our finances to this point and for which ordinary people are going to have to pay the cost

1. Iraq

2. Afghanistan

3. Bank bailouts

4. Gordon Brown’s largesse in support for his voter base in Labour regions

Having been chancellor before he was PM, Brown’s responsibility is very clear. Don’t the public at least deserve an independent review of how we got here ?

What signs of recession are you seeing around your way ?

Round here, I can’t say I’m seeing any. Most people are still going on 2-3 holidays a year and have yet to change their spending habits. Restaurants are full. I’ve got one friend on a 9 day fortnight, and another who has had a customer go bankrupt owing him money. Ocassional stories of people being laid off, but more other people in their organisation or distant friends. A couple of people I know given up consulting and taking on local less demanding jobs. But other than that, very few visible signs round this way, with most people making no adjustments to their lifestyles.

Having said that, I took a drive through the East End of Glasgow during the week. I’ve not seen anything like it. Not the most celubrious of areas to start with, but I would say that 50-60% of shops on the high street boarded up and looking very depressed.

Interested to hear your experiences where you are

I’ve been posting quite a bit here around what is happening in Greece right now, mainly because of the parallels of what happens when a country gets into huge amount of debt, how the situation becomes more and more desperate over time, and the choices it has to make to get out of it.

Goldman Sachs is trying to sort out a sale of $25bn of Greek bonds to the Chinese government. The Chinese in return want a major stake in the National Bank of Greece, which if it happens will provoke major popular outrage.

But what choices do they have ? They are not in a strong negotiating position. The Chinese don’t need their bonds. And they don’t have much to offer in return. A delegation of Greek politicians is going over to Beijing in February to negotiate (beg ?)

See how the balance of power is shifting Eastwards …… but of course it couldn’t happen over here in a couple of years time …… could it ?????

This guy may look like a posh Alan Partridge, but he is worth listening to. He also manages one of the worlds biggest bond funds.

http://europe.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Investment+Outlook+January+2010+Lets+Get+Fisical.htm

Have a read to see what he says about the way US government has been hijacked by special interestson the cheap, and why US and UK markets will suffer more than most next year once quantitative easing is withdrawn.

Thoughts ?