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A short note for George Osborne

October 10, 2012

Just a little thought to help our Chancellor with a basic concept he seems to find difficult, namely the “curious suggestion” that you borrow more to pay less. There is nothing curious about it. Nor is it counter-intuitive as some economists, unhelpfully, suggest.

Let me use the “national economy as a household” analogy, which Cameron and Co. love so much.

Every time someone takes out a mortgage loan to buy a house, having assessed that the repayments will be cheaper than renting equivalent accommodation, they are borrowing more to pay less. Not only are they saving money, they are also investing in long-term infrastructure.

Anyone who could afford to do this, but did not, would be considered unhinged by every Tory voter in the land.

Moreover, the ideal time to do this, would be while enjoying “record-low interest rates” as the government keeps boasting.

I hope this clarifies the concept for our Chancellor. Although I doubt it.

NEXT WEEK in our series ECONOMICS FOR DUMMIES: Demand and Supply; What are they?

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13 Comments leave one →
  1. October 10, 2012 8:42 am

    While I don’t disagree with infrastructure spending, especially as you say at a time when borrowing is cheap so it makes sense to do things we need now (Forth Road Bridge being a good example) I’m not sure it’s quite so simplistic. Using the household analogy of buying a house rather than renting doesn’t really work, the state isn’t currently ‘renting’ infrastructure that we’d save money on. In terms of household budgeting borrowing for infrastructure would be more like borrowing money for a new kitchen, yes the kitchen will add value should you come to sell on (In state terms privatise the asset) but it’s not really a priority to buy that new kitchen if you’re drowning in debt and don’t really need it right now.

    Also back to state terms, again I do agree with some infrastructure spending and I believe the economy could do with some impetus but we do have to be careful. Yes borrowing rates are low but there is still compound interest to pay which in real terms is very expensive, you only need to see how much we’re paying in interest on debts alone right now to see that. Effectively for new borrowing to create growth you need the money and growth generated to outstrip that compound interest rate, otherwise you’re just building up debt for our children to pay. Of course some infrastructure projects will bring in long term rewards, HS2 for example and so are worthwhile and I’m sure there are others that will be looked at but borrowing simply to spend won’t work. Not to mention should we start doing so we run the risk of a downgrade of our credit rating which will almost certainly mean we’d be paying even more compound interest and thus we reach a debt spiral.

    • October 10, 2012 8:46 am

      I disagree. The last two years are littered with evidence of budgets being cut, staff being let go, then expensive private firms (often employing the same sacked staff) having to be brought in. What happened at customs in Heathrow is a prime example. They sacked people then had to rehire them at the last minute at exorbitant rates and had to fly staff over from Manchester.

      The point is, it’s not counter-intuitive at all. We do it all the time. If I borrow money from my employer to buy a yearly travel card, I borrow more to pay less. If I buy a car on credit, because I will save on train fares and be able to shop in large out of town supermarkets, I borrow more to pay less. If I take out a loan to fix my roof before it starts leaking and ruins all my stuff, I borrow more to pay less.

      • October 10, 2012 8:53 am

        I don’t disagree with that at all, I think there’s plenty of glaring evidence of government waste and spending of the type you mention. The Heathrow example was a great case in point of governments in general being unable to run a p*ssup in a brewery but it doesn’t negate my general point that you can only invest in things right now that will not cause interest rate repayments to pile up for the future. Ultimately those interest rate costs will be crippling, if we weren’t paying such huge interest repayments off right now we’d be in a far happier place. Of course government incompetence doesn’t help but unfortunately that’s a cross we will likely always have to bear.

      • October 10, 2012 8:57 am

        There was a valuable lesson to be taken out of what happened in the last decade. But it is a lesson on what not to do during good times. To try to apply it at a time when it is essential for the state to stimulate the economy is utter folly.

    • November 4, 2012 8:56 pm

      the state isn’t currently ‘renting’ infrastructure that we’d save money on.

      Oh but it is – look at all the PFI contracts, which basically are nothing but letting a private consortium lease to government something it used to own.

      Potential results if they are bought out: hospitals cease to be threatened with bankruptcy. Schools get the power back to remove vending machines full of junk food without having to pay usurious costs. Money stops draining out of the pockets of HMG into bank accounts in offshore tax havens (see Queen Alexandra Hospital Portsmouth and Mapeley STEPS).

      The EU bitches, but all they are bitching about is an accounting convention – and what track record do they have?

      • November 5, 2012 10:47 am

        Of course you are quite correct in your remarks about the PFI ownership of various hospitals etc, not a New Labour policy I would agree with at all. I don’t necessarily have an issue with the state leasing hospitals as opposed to renting them, sometimes this can be cost effective, the major problem was the godawful terms that were signed up to at the time.

        In terms of this argument re growth though, buying out those assets from private ownership wouldn’t deliver either growth or jobs and would simply be borrowing to make long term savings against rental costs (no bad thing).

  2. Chris Tandy permalink
    October 10, 2012 9:43 am

    Tom, You offer crystal-clarity in a murky world where the people to whom we are supposed to listen offer nothing but filth-ridden obfuscation. Thanks once more…

  3. Spencer Allnatt permalink
    October 10, 2012 9:44 am

    Thank you Alex, I did not expect to find anything this week (Tory conference) that would raise so much as a smile however,, irony, sarcasm, it all helps to relieve the pain of living under the most syupid and venal government in my lifetime. On a more serious note thank you for the sanity and humanity, long may you continue.
    best wishes
    Spencer Allnatt

  4. October 10, 2012 10:14 am

    Alex, you do patronising in such a nice way. I like your logic and your style. But, if it were that simple, why don’t even dummies (GO, DC et al) get it?

    • October 10, 2012 10:17 am

      You make the mistake of believing GO, DC et al make policy. They don’t. Their donors do. And they know exactly what they’re doing.

      • October 10, 2012 10:36 am

        No, not mistaken; perhaps slightly deluded, though; living, as I do, in hope of some glimmer of truly social policy that pays more than a passing, window-dressing nod to the real needs of us human beings, who are sometimes acknowledged as being the electorate.

  5. Roger Tew permalink
    October 10, 2012 1:06 pm

    Hello to all thefree thinkers out there, Please read, at your leisure, my thoughts on the dire state of affairsthat arestrangleing this wonderful country of ours. I would of course be interested in the thoughts of others. Regards Roger D Tew

    ________________________________

  6. October 15, 2012 6:32 pm

    PFI contracts, Rail Franchises, Bank bailouts under the guise of QE or any other dubious lexicon they can dream up. Money from nothing in conjunction with no money for anything. Corporate welfare assured from the public purse and the public’s pocket, the adoption of government policies first used in the Irish potato famine to teach the victims a lesson. Twelve thousand dysfunctional pleb families were the cause of the English riots and let’s celebrate the centenary of the start of a war which allowed the 1% of the time the unrestricted right to slaughter millions of plebs while the tills of industry kept tringing. The obnoxious selective propaganda of the MSM distilled by cheap news and even cheaper views, distorting truth and facts behind a cloak of toxic smoke and distorting mirrors. Institutions corrupted by their own incompetence and Public Inquiries by the shed load while their findings are shuffled off to the long grass of justice forensically analysed to the point of overkill then the results pointedly obscured.

    Rule Britannia – it certainly rules its slaves

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