Between A Rock And A Hard Place

29th June 09 - Between a rock and a hard place

The trouble with borrowing is that it presupposes that the good times will keep on rolling. It also presupposes that one must have had good times in the first place in order to have been allowed to borrow because the capital element of borrowings has to be paid back over time and the cost of that capital namely interest has to come out of the good-time pot too. That is of course unless you are a sovereign state when the good times can grind to a halt and you simply use your monopolistic power to make your customers (sorry citizens) pay more. This pay is called taxation, whether of the direct or indirect sort.

But then comes the rub. Let’s say some of your customers are sent off the field and some that stay on develop debilitating injuries such that their game suffers. Will you have the will or the ability to stop the borrowing so that the existing debt can still be afforded by the remaining players bearing in mind the law of diminishing returns? Diminishing since there are few things more demoralising than the monopolistic sovereign state grabbing your hard earned bread before you even see it hit the bank balance.

We are of course talking about the UK. Latest figures from The Office of National Statistics show that the Government borrowed a record monthly level of £19.9bn in May 09 compared with £12.2bn in the same month of 2008. That is an increase of 63.1%. No hike in taxation could practically cover such an increase. The borrowing of £19.9bn was the highest monthly figure since records began in 1993. The economic brakes of the credit crisis has caused tax receipts to fall sharply (all manner of taxes - income, corporation, vat, council collected, stamp duty, capital gains) while the hard place has been the benefit payments to those thrown out of work.

You or I would have to budget downwards (the two words suit and cloth spring to mind) but if Mr Sovereign thinks that spending on health and education should be unaffected, even advantageous, then a form of bankruptcy will inevitably occur. Net debt is now 54.7% of GDP (let’s call GDP "income"). Standard & Poor, the rating agency that has the UK on watch, forecasts this debt to income ratio as approaching 100% by 2013. If it passed it, the UK would be technically and I would think psychologically bust.

A busted flush.

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