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Original poster

The deficit - over 85% of it is the cost of the bank bailout!

82 replies

ColdComfortFarm · 21/10/2010 21:07

Ok, I've been really shocked by the figures cited for the size of the deficit - over 927bn. And recently I've wondering what the point of cutting 1bn by axeing child benefit was in the face of such a huge debt. Now I have discovered that more than 85per cent of the deficit is not profligate Labour spending, but the cost of the bank bailout that saved the country from total financial collapse. The deficit in April EXCLUDING the bank bailout was 156bn (not pocket money but nowhere near 927bn). The cost of the bank bailout was £850bn source here: www.independent.co.uk/news/uk/politics/163850bn-official-cost-of-the-bank-bailout-1833830.html
Economists and people who seem to know about such things on Mumsnet keep saying that no real money has actually gone to the banks - that there are guarantees which have not been used, and which are being paid for very handsomely by the banks, and money spent on shares, which have risen in value....so are we being sold a totally artificial panic? It seems so.

OP posts:
Chil1234 · 21/10/2010 23:08

Aha... the budget deficit in 1976 was 6% of GDP when we had to go to the IMF for a loan. So 11.4% is, in that context, pants.

said · 21/10/2010 23:11

On Question Time now

Chil1234 · 21/10/2010 23:12

@claig... If you open out that chart I linked to earlier you'll see that National Debt dipped briefly in 2001 and 2002 but rose steadily thereafter from £350bn in 2003 to £525bn pre banking crisis in 2008. The bank bailout mostly affected the 2009 numbers. We haven't bailed them out since but both the deficit and the debt are still rising.

claig · 21/10/2010 23:14

how much are we paying in interest on the national debt? Is it equivalent to the deficit? If so, is the deficit really the problem, isn't the national debt the problem, which is as a result of the banking crisis. Who are we paying this interest to? Sovereign funds or someone else? Who is flush with cahs and accumulating all these interest payments? Can we not renogiate these interest payments globally in conjunction with every other country, so that the burden per year is less and so that we can invest the savings into the economy?

claig · 21/10/2010 23:18

thanks Chil1234, great figures. Were the opposition shouting about the size of national debt in 2004-2005? Wasn't Gordon supposed to be such a good chancellor that Blair couldn't sack him?

claig · 21/10/2010 23:19

thanks said, good link

claig · 21/10/2010 23:22

Is the deficit about 10% of national debt? If so, will cutting the deficit really make a big difference to interest payments on the national debt?

EightiesChick · 21/10/2010 23:28

FiveOrangePips

Excellent point - this is the bit I have never understood. If there's a worldwide economic downturn, then who are we all borrowing from?

pallette
You mentioned - in response to this, I think - selling gilts on the bond market. Is that effectively how the borrowing happens or am I getting confused? And anyway, who buys the gilts? Privately (very, very) wealthy individuals, China, who?

I have an A in A level economics (from a while back) and there's a huge amount about this I don't understand. Sadly I think that's also the case for both George Osborne and Alan Johnson, and I'm not sure either of them is technically as well qualified as me to run the economy either. No wonder things are going from bad to worse.

EightiesChick · 21/10/2010 23:29

claig Sorry, have just seen you've made the same point about who our shadowy creditors are. This is a very interesting discussion.

poxoxo · 21/10/2010 23:30

eighties hedgefunds, pension funds, private individuals,other Governments etc

Original poster
ColdComfortFarm · 21/10/2010 23:32

If I a wrong (I don't have A level economics!) I will hold my hand up, but let's face it, this all feels like smoke and mirrors, and forecasts are being trumpeted as real figures etc. No wonder there is confusion.

OP posts:
claig · 21/10/2010 23:33

Who is buying the gilts? Is it the bankers and hedge funds? and are they using the money that we bailed them out with? Is it something like the Magic Roundabout?

poxoxo · 21/10/2010 23:33

banks are involved in purchasing bonds

claig · 21/10/2010 23:35

poxoxo, but other governments are all in the same situation as us, and we are told that it is down to Gordon Brown that they were all saved. So it must be the bankers and hedge funds and they must be using the money that we lent them to stop them going bust.

poxoxo · 21/10/2010 23:37

Not all Governments are in the same position Claig China is running an enormous budget surplus and has lent the USA and others a fortune

EightiesChick · 21/10/2010 23:37

Thanks poxoxo. Now it really is starting to feel like a big merry go round with an actually imaginary pile of money. What other governments can afford to lend out at the moment?

QT has just mentioned the possibility of another bank bailout in 2011. Surely that's just unthinkable. Wouldn't there be riots?

EightiesChick · 21/10/2010 23:38

So it is China!

claig · 21/10/2010 23:46

China's economy is about 20% the size of the USA's economy, and I think their banks aren't immune to the global banking crisis

claig · 21/10/2010 23:51

On This Week, Jonathan Powell, one of Blair's ex-advisers just said that Labour tried to reform welfare early on but failed due to its internal divisions. He said that teh Coalition are more united and are being bolder and are using Machiavelli tactics of boldness. Alistair Darling is on there and said he has regrets that Labour didn't go further. That is why I think that Labour are not talking about this.

claig · 21/10/2010 23:53

Labour would do the same thing, but are saying that the Coalition is going too fast and being too bold.

poxoxo · 21/10/2010 23:55

He's right the war between Blair and Brown severely hampered the Labour Government

claig · 21/10/2010 23:59

Yes, that's why they are all probably happy that the Coalition is in power and will tackle welfare, something they weren't able to achieve. Also then they can shout from the sidelines that it is those "nasty" Tories

Chil1234 · 22/10/2010 07:05

"Were the opposition shouting about the size of national debt in 2004-2005? Wasn't Gordon supposed to be such a good chancellor that Blair couldn't sack him?"

What happened in practice was that Brown's forecast economic growth figures were consistently overstated. So every time he announced a 'balanced budget' he was basing his spending levels on the economy doing better than it actually did in reality. As a result, barring a brief period when the national debt went down, the rest of the time we overspent. I'm sure, if you checked Hansard, or responses to various budgets you'll find there were objections raised at the time.

Blair's first years were a time when he could have done all kinds of radical things such as welfare reform, but when he finally got around to asking Frank Field to 'think the unthinkable' the result was that Field was ostracised by his own party. The Tax Credit system was intended to make working a more attractive option than not working but what it effectively did was keep wages low and expand benefits to fairly wealthy households. This is why Brown has often been accused of 'not fixing the roof when the sun was shining'...

The interest on the national debt goes up as the debt rises. And yes, that impacts on the ongoing deficit. But we can't reduce the national debt until we're in a surplus....which would effectively mean cuts of >£180bn and not the £81bn that is hurting so much at the moment. NB. If the economy grows quickly after these measures, the deficit will come down more rapidly but if the economy doesn't grow fast enough there may need to be a second round of cuts in a few years' time.

claig · 22/10/2010 07:30

Good explanation Chil1234.
But we had a national debt of 300bn in 2001 odd and we also had a deficit then (smaller but still there), so we weren't in surplus then and probably haven't been for decades. Whoever was lending us the money to fund our deficit probably thought it was OK and that we could meet our interest payments. Our national debt has ballooned due to the banking crisis and our deficit has increased also as a result of the slowdown in the economy as a result of the banking crisis. This seems to be because we borrowed money (from the bankers?) to lend it to the bankers, to stop the bankers going bust. To reduce our interst payments and to be allowed to keep borrowing, we have to make cuts to the welfare state. How many billion are we cutting a year, is the 81bn over 4 years? Isn't what we are cutting a drop in the ocean when compared with the size of the national debt and the size of the annual interest payments on it? Is that why they can decide to not bother cutting the foreign aid budget, since it is just a drop in the ocean? Since every country is in the same position and had to bail their bankers out, why can't they all get together and renotiate the interest payments to those who are funding the world? We only paid back to the United States what we owed them from World War 2 in the last decade. We must have been paying them at a fairly low interst rate, otherwise we wouldn't have been able to fund our welfare state.

DaisySteiner · 22/10/2010 07:40

My understanding of the reason you can't negotiate with those who are lending us the money, is that unlike with the 2nd world war the money isn't being lent to us by one or two individuals or even a government, but by the 'bond market'. This is made up of lots of different people and institutions - investment managers, pension funds etc etc. It would be like trying to negotiate with the stock market - you can try and influence it one way or the other, but you can't actually say 'OK, if we do x will you do y'. The bond market is hugely powerful and if 'they' don't like what you're doing it is very, very difficult to borrow money at an affordable rate.