Budget Deficit

Since the budget on Tuesday there have been many in the media keen to criticise its details with the wringing of hands and the usual presentation of a bleeding heart. However I do wonder how many of these critics have done the arithmetic of the deficit. For the sake of argument let’s say the national debt is £800 billion. Now, if the money markets are willing to take this up at 4%, the interest will amount to £32 billion pounds a year. This has to be paid out of our taxes. If you do nothing for a year – as is still being promulgated by the Labour party – let’s see what that does. Well, with £150 billion deficit the debt goes up to £950 billion. Now, at 4%, the interest payments amount to £38 billion. However, you have to factor in the response of the money markets to this policy. Indications eleswhere in Europe suggest that they might not like it and interest rates might raise to 6%. Now your debt repayments become £57 not £38 billion. Well, you heve decided to cut the deficit, by 50% in 4 years i.e. 12.5% per annum. A 12.5% cut reduces the £150 billion to £112.5 billion in year 2 – a saving of £37.5 billion. But your interest payments, through doing nothing in year 1, have gone up £19 billion – in other words an overall saving of £18.5 billion. Also the national debt now stands at £1072.5 billion and the interest repayments on that, even at 4% will be £42.9 billion (I think that’s right without using a calculator) and £64.3 billion at 6%. From this you can surely see that a strong policy of cuts now is absolutely vital if we are to be in a position to take accocunt of increased revenues coming from a recovery or covering our backs in the event of a double dip recession. I find the whole, lets leave it alone and perhaps it will go away because we are all going to benefit from some growth, even though we don’t know where it will come from, a very dangerous and lazy argument. Above all it is weak. The Chancellor of the Exhaquer, by raising tax thresholds, is taking thousands of people out of income tax.This a wonderful move and if followed through fully could return income tax to its original intent under Pitt the Younger of being a middle-class tax. I also find it interesting and instructive that Ireland, Greece, Spain and France have taken or are taking similar measures to cut their deficits as we are. Does that siuggest that we are stupid or that the critics just don’t understand elementary arithmetic. Bye for now.