“Labour’s pledges to tackle poverty and drag Britain’s underfunded NHS up to European levels have opened up a £17bn black hole in the government’s finances that will have to be plugged by higher taxes, the UK’s leading financial experts said last night.

“The Institute for Fiscal Studies (IFS), an independent thinktank, said it would cost the equivalent of 6p on the basic rate of income tax for Labour to match the average European Union health spending, introduce new tax breaks for the working poor and repair the damage to the public finances caused by economic slowdown.”
http://www.guardian.co.uk/politics/2001/nov/29/uk.budget2002

In today’s news about the NHS and spending cuts:

“The National Health Service can make the £15bn to £20bn of savings needed during the next three years without damaging the quantity or quality of care – indeed while even improving the latter – according to David Nicholson, the NHS chief executive.”
http://www.ft.com/cms/s/0/6fba7dfe-e683-11de-98b1-00144feab49a.html

The present NHS budget is c. £104 billion. How come as much as £15bn to £20bn can be saved without damaging the quantity or quality of services – according to the NHS chief executive? That really doesn’t say anything reassuring about productivity in the NHS. The big question is how far much of the same can be said of other public spending?

http://www.guardian.co.uk/commentisfree/2009/dec/11/public-spending-cuts-to-come

Hence why internet spaces are so important.

The point is – unless there differences are stark then voters won’t notice or take care.

Then what is the point of a political PBR?

That would not be true if people did think that Britain was about to devalue its currency.

Anyway, that would only reduce the real value of the existing debt, it would do nothing to reduce the real problem, which is the deficit.

-The lasting legacy of the current government may well be the loss of the UK’s
AAA sovereign credit rating
-We think the UK’s debt affordability and reversibility look set to deteriorate
rapidly
-Rising yields pose a significant challenge to the affordability of the debt burden
-The end of QE will significantly weaken demand for Gilts and the financeability
of the government’s debt
-The necessary political consensus to deal with the burgeoning fiscal problem
seems to be absent

Whatever you think the UK can afford to spend, the foreign investors wont let us…..

That is the situation that makes us completely dependent on the willingness of foreign investors to lend our government money. We had better hope that they weren’t too frightened by what Darling had to say.

There is most definately a limit to how much we can borrow.

Japan’s debt is issued almost exclusively to domestic buyers who have been forced and encouraged to soak up vast amounts through regulation and the carrot of a ‘risk-free’ carry trade provided by the central bank whereby the banks borrow overnight at low rates to fund long term government debt holdings at a higher yield.

Japan is almost unique in being able to get away with this because of its huge current account surplus (as one of the worlds leading manufacturing and exporting nations) which provides the domestic economy with the capital to fund the government. Even so, this has completely warped the economy to the extent that credit is barely available in Japan as banks main asset is government debt and the same is true of pension funds etc. Now their ageing economy needs real retirement funds, the debt is being sold leading to a rise in yields which threatens a spiralling borrowing cost for the government and debt expected to reach 230% of GDP next year. Many of the major hedge funds now have significant capital betting on a Japanese sovereign default in the next two years.

The UK is a huge net importer (of practically everything including food and fuel) and runs a massive current account deficit. The above strategy would wipe us out within a very short space of time as we could not begin to fund our deficit domestically for anything like that duration. Over the last year we have been printing money and buying Gilts – but not nearly in the same amount as we have issued them – but in the same period foreign ownership of Gilts has actually declined as our debt has multiplied. That is staggering and implies a deep lack of faith in our debt by foreign investors.

Quantitative Easing (money printing) is due to end in February at which point we will be completely dependent on foreign investors to fund our deficit. There is then nowhere near sufficient capacity domestically to fund it. This situation is deeply worrying and means we will be exposed as a nation to the yields that these foreign investors are willing to lend at (which should be acceptable, if we have a credible budget and plan for deficit-reduction). Money printing is only an option the markets will tolerate when used as a weapon against severe deflationary onsets of the sort we saw last year – the markets will now not tolerate further printing as this would be seen as monetisation of debt and could cause a substantial fall in sterling (followed by inflation as our imports shot up in price).

So unlike Japan we are dependent on the wilingness of foreign investors to fund our lifestyle and government spending. They will only fund is if they think we are a good credit, will repay the debt, will not print money to weaken the currency they invest in and will not risk inflation that would devalue their investment.

So as a huge importer there is a huge constraint on how much money we can borrow or print. The markets are already very nervous about this, trust me, just read the financial press and you will appreciate this is no longer seen as paranoia but in the wake of Dubai, Ireland and Greece as a real risk. If Darling increases his borrowing requirement much beyond his projections, a run on sterling and the Gilts market is quite likely.