Petrol Price Budget

[wemorgan]

Could some economics type person explain to me how we will pay back the borrowing in a clear manner to counter the media hysterics.

I'm guessing we're not going to directly pay £10k each in 2011.. so what will it be? Additional NI? 1/2p in the pound increase over 20 years?

As far as I know, the Government borrows money from the Bank of England.
The BoE can either simple print more money, which it has been doing. But in the main the BoE sells Bonds. Bonds are bought by financial bodies, like investment banks, pension funds, private investors etc. Bonds typically offer a fixed APR on the investment, so are seen as low risk investments, if rather low yielding.

Hope I've got my facts right there.

 

[wemorgan]

I think you may find he is planning to borrow more like £175 billion this year the rest is being raised by taxation... trouble is paying back the £175 bn will be an onerous tast....

I think Hawk was quoting the 4 year debt figure. You've given next years figure.

 

[Ade B]

Thanks, but how does this filter down to you and me then?

Ade

 

[hawk20]

As far as I know, the Government borrows money from the Bank of England.
The BoE can either simple print more money, which it has been doing. But in the main the BoE sells Bonds. Bonds are bought by financial bodies, like investment banks, pension funds, private investors etc. Bonds typically offer a fixed APR on the investment, so are seen as low risk investments, if rather low yielding.

Hope I've got my facts right there.

Not quite. In fact, the Treasury issues govt bonds. Many people overseas will be needed to buy them as well as UK buyers.

How we will pay back the debt? Partly there will probably be large increases in taxes for many years to come. And there will have to be major cuts in govt spending/public services compared with what was otherwise planned. Spend less and tax more so as to repay the enormous amount of debt.

 

[wemorgan]

Thanks, but how does this filter down to you and me then?

As in how does increased Government debt affect you personally?

The Government 'tries' to manage it's money like you and I. It looks at its income and its expenses. As its debt rises, its interest on that debt rises so it needs to reduce spending to 'balance' the finances.

It reduces spending by spending less on services that you and I use, like heath, transport etc.

 

[hawk20]

It reduces spending by spending less on services that you and I use, like heath, transport etc.

Really? In which year did the govt do this please?

Govt spending has been rising hugely and is doing so now at an even faster rate. The govt plans to slow the growth rate to 0.7% after allowing for inflation.

The debt will be repaid by tax rises unless unprecedented growth in the economy helps to do it for us. (More growth gives higher tax revenues without putting up the rates of tax). But given the damage to banking and much else besides, few expect unprecedented growth. But pigs may fly.

I expect vat to go to 20% once growth returns adding 5% to the cost of cars. And the fall in the pound will put up prices sooner or later. But much more from taxation than that will be needed.

 

[Dryce]

Thanks, but how does this filter down to you and me then?

Taxes. Obviously.

If they sell gilts and the rates are low then they just have ton initially find the interest payments until the gilts reach their maturity date at which time they need to find the capital to pay them back.

So the actual burden initially is actually not so bad even though the figures sound astounding. If.... and that's an important if ...... they can sell the gilts without having to add a large premium to the interest to attract buyers.

The problem as the years go on is that as they add more borrowing at these levels the interest payments will accumulate. Which means an ever higher proportion of our taxes just go to service the debt. And then some years down the line they have to stump up the capital on the gilts as they mature.

That's why the projections over the next two or three years are so important. If the economy doesn't pick up then the debt will become proportionately more burdensome.

 

[Meldrew2]

Could some economics type person explain to me how we will pay back the borrowing in a clear manner

Well, first of all the IMF will send some letters, asking for their money.

Then they'll try phoning, but the Chancellor will always have "popped out for a few minutes" and "the dog must have chewed up the letters"

Finally they'll turn up with the Bailiffs, to be told "Sorry, mate, you're too late. Mr Darling moved out a few months ago........."



At least, that's how Nat West do it

.

 

[Dryce]

The Government 'tries' to manage it's money like you and I.

If HMG managed its money as 'you or I' or at least took a commercial approach it would have slashed spending - cut jobs - cancelled contracts left right and centre.

It doesn't do this for three reasons.

• It can print money
• It can raise cheap finance (compared with you or I)
• And it has a monopoly on your taxes

 

[Meldrew2]

The Government 'tries' to manage it's money like you and I.

So, in basic terms, I represent the Chancellor who "tries" to cut spending, like I try to do at home.

No doubt my wife therefore represents the various Government departments who go on spending more and more...........

 

[Ade B]

Taxes. Obviously.

If they sell gilts and the rates are low then they just have ton initially find the interest payments until the gilts reach their maturity date at which time they need to find the capital to pay them back.

So the actual burden initially is actually not so bad even though the figures sound astounding. If.... and that's an important if ...... they can sell the gilts without having to add a large premium to the interest to attract buyers.

The problem as the years go on is that as they add more borrowing at these levels the interest payments will accumulate. Which means an ever higher proportion of our taxes just go to service the debt. And then some years down the line they have to stump up the capital on the gilts as they mature.

That's why the projections over the next two or three years are so important. If the economy doesn't pick up then the debt will become proportionately more burdensome.

Anyone care to speculate how much additional tax we'll pay?

Ade

 

[Meldrew2]

Anyone care to speculate how much additional tax we'll pay?

Ade

Somewhere between "Loads" and "a Heck of a lot". Seriously, though, I'm betting on VAT at 21% like some other EU countries.