Aasof’s Reflections

The mantra of the previous New Labour Government was that it only borrowed money to invest. All borrowing became an investment and while the mantra may not be chanted by the present Government, the borrowing philosophy continues. Most people (I assume) would define an investment as:

An asset or item that is purchased with the hope that it will generate income or appreciate in the future. [Investopedia]

It is possible to make to make the case that a Government can generate income, or show an asset appreciation, if that government receives revenues from outside its own fiscal jurisdiction. This is not the same as saying that the Government has made a profit. Profit being:

A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. [Investopedia]

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Virtually all governments exist on debt financing, this financing being achieved through taxation, the sale of assets, or the sale of gilts. In terms of Government fiscal policy non of this financing represents a profit but all can be said to represent debt servicing. That is, financing to fund government expenditure. These fiscal measures can only be considered an investment if they achieve a genuine reduction in Government expenditure and are not simply used to service a debt.

The National Debt (capital or interest repayments on it) and any budget deficits are only capable of being serviced from sustained economic growth, or at a least, sustained economic stability. What is misleading, is the ‘sleight of hand‘ used to calculate and portray the debt the nation is in, by not counting liabilities that are ‘off the books‘. Such sleight of hand conceals public sector borrowing as a means of financing public sector spending, or the future Government revenue needed to finance the current ‘off the books’ public sector borrowing, which inevitably increases with the need to service the cost of;

• the interest on earlier borrowing,
• the public services,
• all Government subsidies,
• welfare payments to the indigent,
• present and future pension liabilities,
• servicing of financial structures such as gilts(bonds), Public Private Partnerships, etc.

New Labour’s Faustian Pact sealed by the the 2001 Financial Services and Markets Act has been renewed by the Government’s 2013 Financial Services (Banking Reform) Bill now before Parliament. To paraphrase an abstract from The Week on New Labour’s Faustian Pact:

“Even now, the Government believe that the pact can be revived, and that they can go back to the lost bubble world, which suited them so well. Looking at the ruinous consequences of the Government’s naivety, I don’t know what is sadder: the Government’s demands that the working and middle classes bail out speculators, who earned more in a year than they will earn in their lifetimes; or a delusional Government who would feign shock when their world falls apart”.