Is Spain like Greece ? – No …. not quite – 21/11/2011

Some years ago a small rural town in Spain twinned with a similar town in Greece. The Mayor of the Greek town visited the Spanish town. When he saw the palatial mansion belonging to the Spanish mayor he wondered how he could afford such a house. The Spaniard said; “You see that bridge over there? The EU gave us a grant to build a two-lane bridge, but by building a single lane bridge with traffic lights at either end this house could be built”.

The following year the Spaniard visited the Greek town. He was simply amazed at the Greek Mayor’s house, gold taps, marble floors, it was marvellous. When he asked how this could be afforded the Greek said; “You see that bridge over there?” The Spaniard replied; “No.”

Some people are still not listening – 8/11/2011

It would seem that many people in the UK’s Public Sector, and in those of Greece, Italy and Spain, are still not taking on board just exactly how indebted our respective Countries have become.

Our own Public Sector in the UK, and their Unions, seem to think that it would be a good idea to take strike action whilst the Country as whole is desperately trying to survive the previous Government’s massive and indiscriminate overspend. Presumably, their delusion also extends to the belief that strike action will somehow incur public sympathy, and may even force the current Government to change their intentions regarding their massively generous public sector pensions.

There will be little or no sympathy for such industrial action.

What is it that is so complicated, or difficult to understand, about an obvious statement of pure economic fact? – “There is no money left”. Even the last Government left a note to that effect. 

For several years now, here in the UK, there has been a new and growing sense of “class distinction” between those “with” public sector pensions, and their stupidly generous contracts of employment, and those “without” them. The paying public is becoming more and more aware of the vast, unjustifiable and unaffordable cost of it all.

Labour Party leaders and the Trade Unions would have you believe that the solution is to borrow even more money, in order to maintain employment in the public sector. However, borrowing even more money would actually throw our ability to repay it into severe doubt, and therefore cause a several fold increase in interest rates. Indeed, this has already been amply illustrated by Italy, Spain and Greece.

Such a catastrophic increase in borrowing costs in the UK would inevitably increase mortgage payments, and further reduce the amount that we all have available to spend in the high street. As a direct result, even more small businesses would then fail, along with the vital employment which they provide. Ironically, it is precisely those types of small businesses which we desperately need to flourish, not only to develop additional employment, but also to fund the public sector from their tax revenues.

Right now, some statesmanlike honesty from our Labour politicians about the size of our national debt and our borrowing requirements, would be most welcome, and some genuine national leadership from the Public Service Unions concerning their members massively generous employment benefits, would not go amiss either.

Having said all that, most of us do have a great deal of sympathy with public sector employees as individuals, especially those at the point of service provision. After all, nobody likes to lose their job, or have their employee benefits reduced, but there has to be some sort of public realisation, that the private sector does actually pay for the public sector, and at this moment, the truth is that the former cannot afford to pay for the latter.

The Government is absolutely correct in reining in public expenditure, and increasing taxation, assuming we do not want to become a bankrupt economy like Greece. The poor people of Greece have yet to appreciate the full implications of their own politicians refusal, over the last five years, to get their own public spending in order. Now it is too late. Their alternatives are stark to say the least – stay in the Euro and endure massive forced cuts in public expenditure, or leave the Euro and endure a very large dose of inflation in the next few years.

In the UK, those of us who are old enough can remember a similar catastrophe in this country in 1978 and 1979. During those two years we incurred 50% inflation as a direct result of our politicians’ overspending in the late 60s and early 70s. In case that was before your time, it meant that all our personal savings, and all our pensions, as well as many other assets, halved in value in two short years. We certainly paid for the follies of our politicians at that time, and unfortunately, the poor people of Greece will inevitably have to pay for theirs, one way or the other.

Once people in the UK accept that there has been a huge overspend on our public services, then spending cuts, along with some increased taxation, becomes entirely understandable, and inevitable. However, the Government really must give a lead to the managers and administrators of our public services, and clearly point out what has to be cut and who has to go.

I say this because the overspend is almost exclusively at the top of those services. In other words, it is not the numbers of police on the beat, dustmen on their carts, nurses in the wards, teachers in the classrooms, or soldiers on active service, which are the problem. It is the vast array of overly promoted upper management at the top, who have generated managerial roles and functions for themselves which, quite frankly, simply do not exist. At the very least, they are pointless functions which we do not need and cannot afford.

I regularly hear of local Councils who now have a dozen or more Councillors where five or ten years ago they only had half that number. I also remember some statistics a year or two ago which talked about 80,000 administrative staff in the Ministry Of Defence, when we only had 120,000 frontline troops. How on earth can it take one full time person to organise and supply one and half fighting men? Overstaffing at the higher managerial level is a huge problem throughout all our public services.

The Government has handed down the command for expenditure cuts, but the people who are supposed to be administering those cuts are themselves the very problem. Without some leadership from the Government, higher managers and public servants are not going to make each-other redundant rather than cut front line services unless they are told to do so. 

The next step of the recovering UK economy – 8/11/2011

There are quite a number of ways by which a Government can re-ignite it’s economy. The two usual ones are now being utilised in the UK – ignite the housing market by allowing more house building on Green Belt land – and printing more money in exchange for some limited inflation later on. However, the third, the most difficult and yet the most effective method, has yet to be deployed.

The first one is allowing more houses to be built, and it is the traditional way of boosting the economy. However, that begs the assumption that there are sufficient “first time buyers” out there who have well salaried jobs and who want to buy them.

The second is rebuilding the economy from the corporate end by increasing liquidity in the Banks, through printing money. This also works, but it takes quite a long time to work through the system and create increased employment in the private sector. The tragedy is that extended years of increasing unemployment will inevitably result in very large numbers of people, wives, husbands and children, who will be subjected to huge personal suffering along the way.

The only real way of rapidly boosting the economy, and corporate profitability with the resulting increased revenues to the Treasury, and quickly reducing the unemployment register, is by putting money back into the hands of those who are going to spend it in the high street. Increased spending in the high street feeds directly into small businesses, enabling them to develop and expand.

These are the businesses who currently only employ one person, the owner, but they are also the same businesses who, only a year or two ago, used to employ two or three other chaps as well, and occasionally even some temporary staff when business was really good. They are the artisans or our economy, the painters and decorators, the jobbing builders, the roofers, the electricians and plumbers, the small service providers like TV engineers, financial planners, window cleaners, gardeners, car valet services, take away delivery people, ….. solar power installers, wedding party planners, interior designers, taxi services, butchers, bakers and the candlestick makers….. These are the businesses who will take on the unemployed, teach them a trade, and turn them into happy, ambitious citizens.

For the current unemployed, and the many who will join them from the public sector over the next year or so, speed is of the essence. It is far quicker to start the economy through the high street spender, rather than wait for the Banks to pay down their debt and then start lending into business once more.

At this point, there are a couple of other statistical and economic facts about the UK which I think we should consider.

1)     In the next few years, the retired population of this country will become the single biggest voter category, which is a fact that I hope will grab the average politician’s thinking processes.

2)     The amount of the state pension in the UK is a national disgrace at just over £100 week, and we do now have old people starving in their dilapidated homes or even sleeping rough on the street.

At first glance, increasing the state pension to at least £200 per week for everybody over age 65 (yes 65, not 66 or 67), would seem impossible in the current times of national indebtedness and the dire need to reduce public expenditure rather than expand it. However, it most certainly is possible if we consider the huge capital that has been generated inside private pensions, company pensions, and occupational pensions, since 1978 by allowing everybody to contract out of the state second pension (previously known as SERPS). By my calculation there is approximately £800 billion in these schemes, and there is no reason why this money cannot be repatriated to the national state pension fund in exchange for an immediate increase to a “£200 per week state pension”, for everybody over age 65.

I calculate that, as a country, we would then have approximately 8 to 12 years whilst this “repatriated fund” exhausts itself through the new £200 per week state pension payment. During those years we will need to review and then properly fund our state pension for the years thereafter, through realistic national insurance contributions. I also calculate that the immediate increase to the high street spend, across the entire country, would be very nearly £2billion per week. Such a permanent and consistent boost to the local economy would turn it from stagnation into rapid expansion within months. There would then be very large amounts of new employment, at a local level, for anybody who really wants it.

By increasing the state pension to £200 per week, there would also be a large number of substantial savings to be made, right across the entire public sector. For example, there would no longer be any need for, bus passes, council tax rebates, winter fuel allowances, means testing, attendance allowances, mobility allowances, disability allowances or any other form of pension income assessment for additional benefits, and there would be no need for the people who have built managerial careers for themselves in administering them. All of this is before we consider the benefits to the National Health Service budget simply because of our elderly population would be in far better health, as they could then afford to eat properly. There would also be a substantial reduction in the costs of long term care to the state because the elderly would be largely paying for it themselves out of their own pension.

The more one thinks about it the more one realises that the local economy would rapidly become the provision of services and products which the people want to buy. The people would be in command of those services because they would be in command of their own funding to pay for them, rather than the Council. People would either be over age 65 and retired on a proper state pension income, or they would have a proper job in providing those services.

The local swimming pool would be able to charge a realistic entry fee. Parking fees on council car parks would disappear, enabling people to visit town and spend their money in the way they want, rather than the way local government prescribes, and if the supermarket chains were at last made to pay the same business rates as the small high street retailer, the high street and the local community would thrive again.                                                                                                                                                                                    

Speaking as an economist and an investment manager, there is no doubt that the current Government will eventually get our economy right. It is just a matter of whether they want to take the fast but radical route to permanent and enduring economic recovery in the UK, directly through the high street, or whether they want to drag the job out by waiting for the Banks, and large commercial interests to pay down their own debt before they start investing in the economy again. The latter will be a very slow and painful process, especially to those who are thrown out of work and may have to wait for several years before they find new employment.

Today, we may well be living at a unique historical moment. It is a period in time when there is a clear opportunity for our politicians to put the UK economy in order for many years to come, and our society and our communities as well. Let’s hope that David has the courage to do it, and secure his place in our great Nation’s extraordinary history.