Can someone explain to me how cutting the budgets so radically and reducing the tax credits/benefits can improve the economy?

[Mongolia]

I don't know much about politics, but I am not stupid either. The thing is this, I am a single mum who is currently receiving tax credits, I have a temporary "professional" part time job that pays minimum salary, I do at least extra 15-20% overtime a week which is never paid, to make matters worse my salary is always late or incorrect.

I am highly skilled, have 3 degrees and plenty of professional experience. Obviously, if I have accepted this "deal" is because I am absolutely desperate. I have been looking very actively for a job for more than a year without success (plenty of lovely feedback though). The problem seems to be that there are a lot of people (highly skilled or not) competing for very few jobs.

In addition to that, I have got several interviews cancelled because the government cut the budget of the organisations offering the jobs. I assume those budget cuts will also result in redundancies that will increase unemployment or make it even more difficult to find a job.

So if the cuts are making unemployment worse (I know, it has been worse decades ago, but now is worse than 2 years ago), there are many people earning less than they should as there are far more willing people to work than jobs available, the average spending power is also reducing, and the tax credits are going to be reduced as well... How is the situation going to get better?

Reducing the number of entitlements to benefits and the level of the benefits themselves would reduce the amount of money the State had to pay out, that is reduce the amount of taxpayers' money spent. The State is in so much debt, which is very expensive to service, that the only way the govt can hope to improve the situation in even the medium-term is by spending less. As you suggest, however, they'll have to do a good job of estimating the likely levels of unemployment and obvious EXTRA costs in JSA, HB and other benefits measured against the SAVINGS they think they'll make by spending less on everything else.

At the same time, they're crossing their fingers that the private sector can get things going again, which will be harder with people earning less/paying higher taxes, but simply maintaining current levels of public spending is unsustainable as the rest of the world would end up judging (rightly) that the UK's creditworthiness wasn't good enough to justify continuing to lend us all the money we're borrowing at rates that we could afford to repay.

Does that help?

Where have you seen that they are reducing tax credits? The only suggestions so far is that people on moderate incomes... £50k-ish... should no longer qualify. The new government team seems to be at pains to point out that those people in genuine need of financial support will not be left behind.

When it comes to tackling deficits it's a balancing act. If you raise revenue too sharply through taxation (personal, business, investment, consumption) then you're likely to see knock-on effects as disposable income drops, consumption reduces and companies can't afford to employ as many people. If you cut spending on public services too sharply then you also risk job-losses which, in turn means less money coming into the exchequer and less money spent in the shops. So there has to be a bit of both

What's worse than either of those, however, is the status quo i.e. continuing to rack up crippling amount of debt so that when the national economy eventually gets back into growth we're using it all to pay off the overdraft rather than investing in the country.

"they'll have to do a good job of estimating the likely levels of unemployment and obvious EXTRA costs in JSA, HB and other benefits measured against the SAVINGS they think they'll make by spending less on everything else."

That's exactly what I'm wondering about , because the situation is unsustainable, I understand that, but wonder if we are heading for a full economic depression if too much public spending is cut in the short-medium term.

"The new government team seems to be at pains to point out that those people in genuine need of financial support will not be left behind."

Yes, but if there are thousands and thousands of people in genuine need of financial support, who have been genuinely looking for jobs without success we can estimate that even at the £64.20 per week JSA rate, the government would be able to save a lot of money, but isn't the rest of the economy going to get hit and badly when these people reduce their expenses drastically? wouldn't that in turn bring even more businesses down?

They aren't going to reduce tax credits or benefits (if you have info otherwise, a link would be great).. They probably will lower the maximum income level for tax credits though. (rightly so IMO, although there is huge discrepancy across the country and something like London weight should perhaps be taken into consideration, but won't)

There is room for cuts, winter fuel allowance for some people (my parents for example), cutting child benefit wouldn't be popular (least of all with me), but plenty of people could live without it. Trouble is that means testing for these benefits could cost more than the saving.

I do wish that the government would realise that if they spent a bit more money funding childcare, more people would be able to go back to work. I was full time, but logistically and financially i'm better off doing 2 days a week. If I got help with childcare (am not entitled) then I could go back 4 days a week and actually pay some tax, which would more than cancel out he cost of the childcare.

damn... ignore the rambling please, hopefully I have got my point across.

Yes you did, thank you.

The loop I'm in is the lack of available jobs, I have had a look into cleaning but have no one to take care of DS during the evening/early hours.

In any case, it doesn't matter, as soon as they see the CV they want to know no more...

then lie on your CV?

Different versions of CV, tailored towards the job. Omit things if it makes it more likely that you'll get the job (like all your degrees, for example)

Article in the FT today on this very subject.

Mongolia - reading between the lines, it would seem that you are in a state-sector job.

My advice: move to the private sector if you can. There are going to be many fewer state sector jobs in future, with fewer benefits attached.

"isn't the rest of the economy going to get hit and badly when these people reduce their expenses drastically?"

That's why I say it is a balancing act. The economy is already 'hit badly' - but most of us aren't seeing the effects just yet. If we keep borrowing to finance government spending at current levels the interest payments (as explained yesterday) will cripple the country for years to come. If too many people end up unemployed they will be a drain on the economy. And if too much revenue is raised through tax we reduce disposable/investment income that way as well. It's a complex equation.

Another point is investment in new/green tech, r&d, infrastructure etc. Currently the govt can't afford to invest in job-making schemes like road/bridge/windfarm building etc, etc. Hopefully new (real) jobs will be made in this way when less is spent out on the extraordinarily top-heavy and enormous beauracracy that was created by Labour.

The economy can never be healthy if so many jobs are public-sector ie paid for by tax revenue. It becomes self-defeating, even in the good times. And in the bad times it means that the govt can't easily become leaner and meaner (like the private sector has had to become over the last couple of years).

The really good news is that UK manufacturing is currently experiencing something of a resurgance due to the weak pound and hiring again.

Mongolia, you are completely right, cutting government spending does have the potental to make the economic situation substantially worse.

Paul Krugman (Nobel prize winning economist) has been posting along these lines on his blog - you might find some of his posts interesting (and this one ).

Indeed, there is the potential for the cuts to have a perverse effect if they reduce economic activity because that will result in a fall in tax revenues and an increase in benefit spending. No matter how drastically benefits are cut (and they are already low), if there are 1980s or even worse 1930s levels of unemployment then unless people are literally left to starve then there will be a lot spent on benefits.

PK's view:
"The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered ? specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound."

We are in pretty insane territory here - my favourite is the "Tinkerbell principle" - we are making cuts so that people believe we are serious and therefore won't start refusing to buy our bonds. Bluntly, anything named after a fairy is pretty dubious (no offence to any winged creatures on here).

On the other hand The Economist is, in general, in favour of radical cuts.

Well yes, but they generally have quite a right wing agenda, so it fits with their overall world view.

I don't think any one argues that it isn't important to reduce the budget deficit, it is a matter of timing & how it is done (what proportion is cuts vs tax increases for example).

Its also very important to remember exactly how much money went to bail out the banks when laying the blame for the deficit.

The money laid out to keep the banks afloat was pretty much a one-off payment and, for that, we got an investment stake in those businesses so the money hasn't 'disappeared', as it were. We'll get it back at some time in the future. The 'quantative easing' exercise was a similarly finite amount.

The debt we're racking up now is totting up on a daily basis. For every £3 in tax we're spending roughly £4 - and that isn't on capital investment so much as simply keeping everything running. Like someone using a credit card to pay for all their regular outgoings but only being able to pay off 3/4 of that bill at the end of the month ... that's why it's a bigger problem. It's not a one-off.

Chil1234 of course it is true that we are running a deficit at the moment. Its important to remember though that it is absolutely normal to run a deficit at this stage of the economic cycle (because tax take is down & social security spend up).

Clearly, we have a problem - both a systemic problem - we didn't run a sufficient surplus in the boom years (and our economy has become very unbalanced and dependent on financial services, going back at least to the 1980s), and also an immediate problem in that we spent a vast amount propping up the financial system.

Like I say, no-one argues that there is a need to rebalance, the question is when & how.

Takver - I don't see how Krugman can be so complacent in his Lost Decade post re. the significance of 10-year bond yields "this morning" and whether they represent pressure to cut now.

("Countries not in that situation are not facing any pressure from the markets for immediate cuts; as of this morning, 10-year bonds were yielding 3.51 in Britain, 3.21 in the US, 1.27 in Japan.")

There are a number of comments below picking him up on it for various reasons (that the UK's indeed reflects confidence in the government to follow the programme it's outlined; that things have a tendency to be fine and then go whoosh etc.) and I find them all more persuasive.

I think he probably does overstate the case - and takes an overly rosy view of the state of the UK economy.

But I think equally it is important that the significance of cutting at this stage in the cycle is realised - that it is not simply going to be a case of people out of work because of job cuts in the public sector, but that there will also inevitably be a substantial multiplier effect.

Or, to put it more succinctly, 1980s - and possibly 1930s - here we come . . .

More positively, DH & I have been wondering about Japan - sure, they have had a no growth decade, but how bad was it truly if you were Japanese? I don't have any good evidence, but I have a suspicion that actually people weren't really in a bad way. Anyone know anything about conditions there in the last 10-15 yrs???