Wednesday, February 4, 2009

9: Its a Cart and Horse thing!

Caught in the headlights of recent events, Governments are revealed naked huddling together for warmth; flustering and blustering, and trying to make us look away again. But whilst they have our attention it may be worth looking a little closer ... What exactly are they? What do they do and what should they do? On the face of it, these questions ought to be answered quite easily, but search the web and you'll see they are not.

Here's a selection ...

  • The body with the power to make and/or enforce laws for a country
  • A group who hold the monopoly on the legitimate use of force
  • A method or system of controlling people
  • National body of the people's representatives
... I had the impression that they should be working for us, to coordinate something that we want! Only the last bullet came anywhere near and none were more explicit.

As I recall we had a Civil War in England to resolve this, with Charles I coming to an untimely death 1649 at the hand of Oliver Cromwell. Before that time, the King was undisputed boss; after that the Government agreed to behaves according to written laws, a Constitution ... Sadly we never got round to writing one, so by 1660 Charles II was on the throne, behaving much as dad had done before. So being English, it seems we muddled along from there; getting on with our own business, paying our taxes, and believing that 'they' are looking after our interests ... I guess we got the Government we deserve; how about you?

Written or not, right up there in the constitution after 'human rights' should come 'protection'; the former gets a lot of attention, but I'm not sure the latter gets enough. In earlier days Gun Ships and Troops may well have been the appropriate tool to protect the Nations Economy, but clearly in this globalised world and market they are not.

Ok, I thought you'd like some numbers using the UK as an example. At 60m people, it is almost exactly 1% of the World Population, and we are responsible for 5% of the worlds Gross Domestic Product (GDP)[1]. GDP is the sum of every above-the-table financial traction that occurs in a year; and for the UK in 2006 it was £1.2T (thousand billion) ... the buying and selling evidence of us being a rich country.

The HM Government finances all of its activities by Taxation and Borrowing. Again for 2006, HM Treasury collected from all sources about £450B in taxation (38% of GDP); then borrowed an additional £40B to meet spending plans (We might expect the borrowing in 2008/9 to be very much more!). Quite literally this £490B (The Budget [2]) pays for the infrastructure that we recognise as 'Modern Britain'. As at the Government spends what comes in as it comes in, the Treasury doesn't get chance to put anything 'in the bank' for a rainy day!

... The Treasury figures show that of that £450B tax revenue, more than 80% was collected as taxes on the Person[3] whilst just £60B was collected by direct taxes on the Business[4]. There is no doubt that Business is the 'engine of the Economy', so it seems its contribution to UK GDP is through UK employment ... Each of the UK's 29.1m workers contributing nearly twice his/her salary[5]; which seems improbable until you realise that GDP counts Salary as it is paid to you, then again in pieces as it is taxed/spent!

... As for outgoings the Treasury tells that the biggest spending is on Social protection (£137B/28%), Health (£83B/17%), and Education (£64B/13%). Below that 5 broadly equal categories account for 32%[6], with a 10% "Other" category for the rest.

So you can see that if the UK Economy slows by (for example) 2.5%, that the Tax Revenues will fall by over £10B; If that fall is accompanied by increased unemployment, then the Social Protection costs will rise (I guess by about the same order); And if HMG was planning on 2.5% growth ... We are talking a short-fall of ~£30B, and nothing in the kitty ... Where would you cut Government spending by £30B? Quite literally they have no alternative except to encourage us to spend and borrow lots, so the tax keeps coming in.

If the banking crisis is a short sharp glitch in an otherwise stable economy then it is ok to borrow to smooth it over. But if it is actually a devaluation (ie it was inflated above its rightful value) then borrowing cannot fix it ... Its the difference between deflecting a wave, or holding back the tide?

So what of the future? I'm no economist, but I am mathematically literate. We are helping to develop the world, and raise its standard of living to that of our own. So in an equitable world we cannot expect to maintain that disproportionate share of GDP, and must expect a GDP in proportion to our population, ~1%[7]. The classic answer is that we will be taking a smaller share of a much larger cake, so that share will still be a growth in cash value. But the worlds GDP is only growing at about 3%pa so will only double in 30yrs. So the cake isn't very much bigger, whilst the slice is much smaller. It represents a cut in UK GDP/Budget by a factor of 2.5 on today's values ... That Government will have to deliver the expected services on just 40% of the money; cut its services by 60%; increase taxes by a factor of 2.5; or an acceptable combination of these!

... On the 'bright' side it may take 100yr for the living standards of the world to level; in which case we should be able to hold our economy at today's level. But can we expect world progress to hold-back for that long? People put up with adversity and suppression as long as they are not aware of a better alternative. But education and the internet allows everybody to see what other have ... History is littered with revolutions over less.

So, returning to that question. If a Government takes nothing from the people but delivers the protection they need; then it definitely works for the people. Conversely if the Government does what it wants and takes from the people as much as it can without actually killing them off; then the people are a managed cash-crop.

... I guess the answer lies in where you see 38% taxation on the cost/value scale?


#1: From what I can establish the story is similar in all 'developed economies'.
#2: It seems HM Treasury have taken the spreadsheets off the web, but I have them for 2003 and 2006 if anybody wants them.
#3: Income Tax - 29%, National Insurance - 17%, VAT - 15%, Excise Duties - 8%, Council Tax - 4%, Other (Capital taxes, Stamp duties, Vehicle Excise duties, Interests and Dividends) - 14%.
#4: Corporation Tax - 9%, Rates - 4%.
#5: Actually 1.87 = GDP (£1.2T)/Workers(29.1m) x Average Salary(£23,080) [HM Treasury figures]
#6: Personal Social Services; Transport; Defence; Debt Interest; Industry Agriculture and Employment; Public Order and Safety; Housing and Environment.
#7: This overlooks the growth in ROW vs UK Population, respectively 2%pa and 0%pa.