FAQs on the Government's economic policy

What is our economic situation? What is Government policy? How do we carry on spending billions we haven't got? What about a plan for growth? Answers to these questions and many more...

How is our government building our economic house?
David Davies MP
On 6 July 2012 12:34

I get many emails asking me to clarify why the government are making the economic choices they are. Many of them call for a ‘Plan B’ or a "programme for growth." What these are really suggesting, is that the government spend more money. A lot more.

When our plan for the economy becomes unclear, we must remind ourselves, and the public, why we are doing it. 

I have set out the economic approach being followed by the coalition in FAQ form.

1.       What is the economic situation?

When the coalition government took office in 2010, Britain was collecting £513 billion in taxes and revenue, spent £670 billion, and therefore borrowed £157 billion.

The total national debt stood at £760 billion.

The figures for this financial year are £592 billion collected, £683 spent, and therefore £91 billion borrowed. The national debt will stand at £1159 billion.

2.       What is the government policy?

Simply, to spend the same amount as we earn. This will take at least four years, and by then we will have accumulated a national debt of around £1500 billion.

At present there are no plans to pay off the national debt. The only aim is to stop it increasing.

3.       How will this be achieved?

By collecting more in taxes and spending less. In some cases, this means significant cuts to public services, such as the police and armed forces.

However, the overall level of spending by the next election will have only fallen by around 4 percent.

4.       How do we carry on spending billions we haven’t got?

We borrow the money from a range of sources, including banks and foreign governments.

5.       But don’t the government give money to the banks?

The government gave £100 billion to Northern Rock alone during the 2008 financial crisis. It is likely thought that the bank loans will be part, if not fully, repaid.

Often, though, it’s the banks that do the giving. The banking industry pays around £21 billion in taxes each year. They are also paying a large percentage of that £91 billion we need to borrow.

So essentially, the government needs the banks more than the banks need the government.

6.       Surely the banks caused the crisis though?

The Western financial crisis has been caused by a number of things, however a major problem is debt. In 2001 alone, spending under Labour increased by 4.9 percent; that’s seven years before the wider financial crisis.

They weren’t alone though. For many years politicians in democracies have tried to stay in office by spending money they didn’t have. A school here, a hospital there; anything to tip the polls in their favour. They did this knowing that few people take an interest in the Gilt markets, and anyone who complained could be accused of wanting to ‘destroy jobs’ or ‘impose cuts.’

7.       That sounds a bit biased

It is. I am biased. But all my figures can be checked out through the House of Commons library, or at www.ukpublicspending.co.uk

Let’s recap:

1997: Labour took office. Debt stood at £352 billion, but government spending what it earned.

2001: Labour decided to spend more than they were earning in tax.

2008(pre crisis): Debt had risen to £527 billion and government were spending around £56 billion a year more than they were earning.

2010: Labour leave office. Debt is around £760 billion and government spending £157 billion a year more than it was earning. This money has to be borrowed and added to the national debt.

8.       Okay, I’ve checked the figures and they’re accurate, but isn’t there an alternative to the cuts? What about a ‘plan for growth?’

The ‘plan for growth’ is actually a euphemism for borrowing more money than we already are. Sound familiar?

The theory goes that the government borrows money to spend on a big project, like building a motorway. This creates lots of jobs in construction, and afterwards even more jobs are created.

We spend money to make money.

This sounds too good to be true because it is.

‘Growth plans’ have to generate enough money to pay back the sum borrowed, plus interest.

The government is already spending around £45 billion a year on interest payments alone – this is more than the defence budget.

This is actually a low figure, because those lending to us have confidence that we will pay the money back.

Countries that want to carry on spending money they don’t have (like Greece) can no longer borrow money easily and therefore need to be bailed out.

We don’t want to go there.

So, in order to ensure that banks and other countries retain their confidence in the UK’s willingness to sort out its deficit, this means sticking to the plan to spend what we earn.

I think we have learnt enough from the past decade to understand that a ‘growth plan’ is a thinly veiled call for ‘increased spending.’

9.       If borrowing is out of the question, can’t we put up taxes?

People are very happy to call for higher taxes unless they have to pay them. One of the biggest complaints in my inbox is about petrol prices. Further taxes would be very unpopular.

10.   Shall we tax the rich more, then?

The ‘rich’ already pay a lot in taxes – around 24 percent of total tax revenue comes from the top 1 percent of earners.

Leaving aside issues of how fair it is to remove over half of someone’s salary, there is a practical problem. Beyond a certain level of earnings, people stop paying taxes, either taking their money abroad or stopping work.

Until these tax avoidant measures are closed, raising taxes will be in vain.

11.   Is there any good news?!

This government has got the chance to demonstrate to the public the scale of the financial disaster we are dealing with. Facing up to the importance of spending within our means is all part of the uphill battle, but one which future governments will thank us for.

To those who claim to have a better way, I ask:

How much do you think the government should borrow every year?

How much interest do you think should be paid each year?

What do you think will happen to the UK if we rely on the diminishing number of international banks with money to lend? 

David Davies MP is the Member of UK Parliament for Monmouth. He also serves as a Special Constable for the British Transport Police

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