Stick or Twist?

Stick or Twist?

Having the Chancellor’s ‘autumn’ Statement in deepest ‘winter’ on Wednesday tells you all you need to know about the current state of our economy and politics……confused.

For all the spin, counter spin, political arguing / point scoring and statistical skulduggery……it is important we understand the simple facts of the current situation.

1.     Under the Labour Government, the UK’s public outgoings were far higher than the public incomings. This deficit was the highest of all developed economies in the world and resulted in the UK public borrowing reaching record levels to bridge the shortfall in income.

2.     In May 2010, Mr Osborne promised to eliminate this budget deficit within 5 years through the austerity measures of higher taxes and public spending cuts. Or to put that another way……the Government would have more money coming in and less going out. The job losses from public sector cuts and increases in taxes were sold to us on the basis of “short term pain for long term gain”.

3.     Mr Osborne’s original estimates were calculated using assumptions on economic growth provided by the Office for Budget Responsibility. Mr Osborne then reviews these periodically and manipulates UK income / expenditure through the budget each year to ensure that we are on track.

4.     Wednesday was the half-way point in the 5 year plan. The result……the income / expenditure hole is actually bigger today than it was in May 2010. 

The Government is powerless in addressing our finances by using fiscal policy if it doesn’t ignite the economy. 

We are now in a Catch 22 situation. If taxes are increased and public expenditure is cut further, this will have a detrimental impact to the economy. However, if the Government borrows further to ignite the economy, it will have more income through taxes in the long term but the financial black hole will get bigger and the deficit will not be addressed.

Stick or Twist?

Well the current Government have decided to ‘stick’. They will stick to the continued plan of tax increases and spending cuts but the outcome will be a 5 year plan becoming 6 (very optimistic), 7 (doable just) or 8 (realistic) years to complete. Throw in a General Election in the middle of all of that and any figure you pick has a decent chance!

A dire state of affairs......