Hello to the long haul, or please cough up £71,700

Have you been trying to keep track of the government debt bubble, which has succeeded the dot.com bubble and the property bubble? The word ‘bubble’ sounds pretty, a vision of children blowing rainbow-coloured soap bubbles into a blue sky. We need another word, but the debt ‘bubble’ is so huge, so threatening, that few words suggest themselves as candidates. Poisonous cloud? Giant asteroid? Fatal avalanche?

At my last estimate, the UK’s national debt was accelerating towards £1.5 trillion. The announcements this last week that the government’s insurance scheme for banks’ dud assets, false assets, could be £500bn instead of the £200bn previously announced, takes the likely total to £1.8 trillion. The £200 billion, it quickly emerged, is nowhere near enough. The Royal Bank of Scotland has proposed ‘insuring’ up to £325 billion of ‘assets’ that are really liabilities, leaving only £175 billion of the £500 billion for Lloyds Banking Group, which harbours the stricken HBOS. Royal Bank of Scotland cannot afford to pay the ‘premium’ to take part in the insurance scheme and so will ‘sell’ to the state £6.5bn-worth of preference shares that, if converted in future to ordinary shares, would give the state some 85% of the bank. Meanwhile, government – taxpayers – are effectively lending Royal Bank of Scotland enough money to take part in the insurance scheme that government – taxpayers – are funding. Why bother with all this pretence of independence? Royal Bank of Scotland should be fully nationalised, restructured, downsized and simplified.

Back to the £1.8 trillion. How long would it take us taxpayers to repay this staggering sum? The median income tax paid in 2006-07, the latest year for which Her Majesty’s Revenue and Customs have this data, was £2,330. If I paid £2,330 a year to pay off the National Debt, how long would it take? The answer is 772.5 million years, or more exactly, 772,532,188.8 years. And this is if every penny went to repay the National Debt, meaning that there would be nothing at all to keep public services going.

Let’s look at the number of households in the UK, about 25.11 million. If they all paid £2,330 a year to repay the National Debt, how long are we talking about? The answer is 30.77 years. The prospects for every household in the UK stumping up £2,330 a year in National Debt repayments are exceedingly dim. Of course some households could afford to pay a lot more than this, and income tax is just one stream of government revenue, but these sums are still grim.

The £1.8 trillion is a near quadrupling of the £513 billion National Debt when Gordon Brown became prime minister in June 2007,  a burden that cannot be borne without either slashing public services, increasing taxation to penal levels, or increasing the money supply thus causing inflation that, in theory, would make the real value of the debt diminish.

All three options carry toxic effects:
•    Taking the axe to public services would make unemployment balloon, imposing new costs in welfare benefits. Cutting welfare benefits in response would lead to social breakdown.
•    The option of piling on more taxes would damage consumer spending, in turn leading to greater unemployment, with consequent pressure on the welfare budget and on social stability.
•    Increasing the money supply is notoriously hard to control and could lead to a terminal collapse of confidence in sterling, as overseas lenders to the UK government worry that their loans will be repaid in worthless paper. At home, devaluation of the £ resulting from ‘quantitative easing’ or boosting the money supply would sharply increase the cost of the imports on which we now rely.

The alarming position in which we find ourselves calls for acceptance of lower material prosperity, indefinitely. Economic growth is not the way out. There is not enough oil or gas to power it, and in any case the looming dangers of climate change require us to cut back our burning of fossil fuels. In the UK, we have to bring public spending down into balance with income. Public spending in 2007-08 was £501.626 billion. The government’s total receipts were £472.005 billion, so spending was 6.28% more than income. We also have to increase taxation for the specific purpose of repaying the National Debt. The debt stands at nearly £71,700 per household. Repaying this at £250 per household per year would take almost 287 years, assuming for the sake of the calculation that the number of households stayed the same. Even at £500 per household per year, we are talking about 143 years.

The chancellor, Alistair Darling, has already announced some tax rises from April 2011: a 45% band for tax on incomes above £150,000 a year, an extra 0.5 of a percentage point on national insurance for earnings between £20,000 and £44,000, and 1.5 percentage points more on earnings above £44,000. These increases won’t be enough: we are in for a long haul of high taxes.

There’s no point piling all the blame on reckless and avaricious bankers. Shareholders, including life insurance and pension funds, demanded ever-increasing profits and so can be accused of refusing to learn the lessons of history, one of them being that no boom continues indefinitely. Don’t let’s forget the politicians: they started the destructive tsunami of deregulation back in the 1980s. Politicians, shareholders and bankers have been complicit in an attempt to destroy the economy of the United Kingdom, an attempt that is perilously close to success.

Pay Gap, Debt Cliff

Bankers and their suitcases stuffed with cash! HBOS – the bank that resulted from the merger between Halifax and Bank of Scotland – had 15 directors in 2007, and they sure took a lot of profits as ‘remuneration’. The directors shared a pot of £17.690 million, which if it had been distributed evenly, would have worked out at £1,179,333 each. The bank’s employees received an average of £31,584. Not a bad income, well over the national average – but each director got, on average, 37.3 times more. That is quite a gap.

We know now that HBOS was floundering. Government ‘rescued’ it by engineering a merger with Lloyds TSB to form Lloyds Banking Group, which opened its doors in January 2009. The government – us taxpayers, in the end – had to chip in a few billions of £s here and there to keep the whole show on the road.

Barclays’ directors raked in even more than their HBOS counterparts, a total of £29.273 million in 2007, a mean of £1,721,941. Barclays wasn’t treating the 17 directors at all meanly! Lots of the workers did quite well too, as their mean income was £54,251, but the directors were taking home 31.7 times more.

One of the more abstemious banks in 2007 was Northern Rock. Well, there was a run on it during the year and it was nationalised in February 2008, so it had to show a little restraint. The 13 directors received £3.376 million between them, an average of £259,692. The bank’s staff were not nearly so well paid as their fellows in Barclays, or HSBC, or even HBOS. Their average income was just £20,145 (well, it’s a northern bank, and everyone knows that northerners can live quite happily on scraps thrown from the London table). Northern Rock was verging on the egalitarian, though, as the gap between directors’ and workers’ income was only 12.9 times!

The UK government almost controls Lloyds Banking Group. It does control Royal Bank of Scotland Group, and it owns Northern Rock and the mortgage business of Bradford & Bingley. These banks were deemed too big to be allowed to fail. Their executives (OK, a few have moved on) remain very well paid.

Banks, and bankers, were allowed to get out of hand because government saw its job, its only real job, as helping the economy to get bigger and bigger. Society became the servant of the economy. Who was it who said that ‘Divitiae bona ancilla, pessima domina’ (Riches are a good handmaid, but the worst mistress)? Oh yes, it was the philosopher and scientist Sir Francis Bacon, 1561 to 1626, who died owing £22,000.

We owe rather a lot more than that now, as taxpayers. The UK’s national debt was £513 billion in June 2007. In just 18 months to January 2009 the national debt has quite possibly trebled to over £1,500 billion, or £1.5 trillion. We can’t put a definite figure on it because we don’t know exactly how much the bank bailouts and other economic ‘stimulae’ are going to cost us. In round figures, though, £1.5 trillion is £25,000 for every man, women and child in the UK.

Mission impossible?