A Fate Worse than Debt A Beginner’s Guide to Britain’s National Debt from Boadicea to Cameron

By Lee Rotherham

As the UK talks of cuts and austerity, this book explores for beginners the true scale of our financial problems, and some of the controversies behind modern spending.
Warning: do not read if you suffer from high blood pressure, or lack a sense of humour in a crisis.

Among the questions answered are:
•What is the difference between Deficit and Debt?
•How much does the United Kingdom Government really owe?
•Who is Scotland’s forgotten debt genius?
•How big could you build a new Hadrian’s Wall from Pound coins paid out of Britain’s debt?
•Why was Britain’s first civil war two thousand years ago triggered by debt repayments?
•How did WW2 US airmen unexpectedly help bail out Britain’s war effort?
•What was the Geddes Axe, and how far did it swing?
•What can a wombat’s posterior warn us of?
•How big is our creek today and is there a paddle?

Launched to coincide with the Coalition Government’s “make or break” 2013 Budget, this book puts the country’s financial problems firmly under the microscope. It explains what is going on and why in terms the layman can understand - and will find absolutely terrifying.

Possibly the most important - and terrifying - book about government you will ever read.

• Language: English
• Publisher: Bretwalda Books
• Release date: Mar 27, 2013

Book preview

A Fate Worse than Debt

A Guide to Britain’s National Debt from Boadicea to Cameron

Dr Lee Rotherham

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Published by Bretwalda Books at Smashwords

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This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each person. If you're reading this book and did not purchase it, or it was not purchased for your use only, then please purchase your own copy. Thank you for respecting the hard work of this author.

First Published 2013

Copyright © Lee Rotherham 2013

Lee Rotherham asserts his rights to be recognised as the author of this work.

ISBN 978-1-909099-43-2

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Contents

Foreword

Part I - Introducing Debt

Chapter 1 The Official Line: Plug the Hole Slowly

Chapter 2 Not just the State

Part II - Lessons from British History

Chapter 3 Boadicea and Rome

Chapter 4 King Arthur the Right Bastard

Chapter 5 Danegeld

Chapter 6 Robin Hood, Prince of Tea Leaves

Chapter 7 The 100 Years War

Chapter 8 The Merry Headless Wives of Windsor

Chapter 9 The South Sea Bubble

Chapter 10 The Forgotten Dr Hamilton

Chapter 11 The Debt to end all Debts

Chapter 12 Geddes vs Keynes

Chapter 13 World War the Second

Chapter 14 The Managers of Debt

Part III - And so to today

Chapter 15 Basic principles, sums, and non-options

Chapter 16 The Ethics of Debt

Chapter 17 Housing: the Ticking Bomb

Chapter 18 The ERM Interlude

Chapter 19 The Moral Vacuum of Government

Chapter 20 The Trouble with Bankers

Chapter 21 The Trouble with Politicians

Chapter 22 The Trouble with the People

Chapter 23 It Could be Worse

Chapter 24 A Way Out

Further Reading

About the Author

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Foreword

By the Rt Hon William Pitt the Younger

(Prime Minister 1783-1801 and 1804-1806)

(by necrophone)

The object I have to refer to the reader is, to consider of the means of decreasing the national debt. To attempt to recommend this purpose by any words would surely be quite superfluous: the situation of this country, loaded with an enormous debt, to pay the interest of which every nerve has been stretched, and every resource nearly drained, carries with it a stronger recommendation than any arguments I could possibly adduce.

To politicians do the public turn their eye, justly expecting, that from the trust they hold, they will think it their duty to make the most serious efforts, in order to afford the long-wished-for prospect of being relieved from an endless accumulation of taxes, under the burthen of which we are ready to sink. Upon the deliberation of this day do we place all their hopes of a full return of prosperity, and that public security, which will give confidence and vigour to those exertions in trade and commerce, upon which the flourishing state of this country so much depends.

Yet not only the public and this house, but other nations look to the business of parliament; for, by the establishment of what is now proposed, our rank will be decided among the powers of Europe. To behold this country emerging from a most unfortunate war, which added such an accumulation to sums before immense, that it was the belief of surrounding nations, and of many among ourselves, that our powers must fail us, and we should not be able to bear up under it; to behold this nation, instead of despairing at its alarming condition, looking boldly its situation in the face, and establishing upon a spirited and permanent plan the means of relieving itself from all its incumbrances, must give such an idea of our resources, and of our spirit of exertion, as will astonish the nations around us, and enable us to regain that pre-eminence to which we are on many accounts so justly entitled.

The propriety and the necessity of adopting a plan for this purpose is not only universally allowed, but it is also admitted that immediate steps ought to be taken to make provision for this purpose. And I am persuaded, that whatever differences of opinion we may have in parliament upon political points, no difference of opinion will this day be entertained that effectual provision be immediately made to reduce the debt of this nation.

Now, where is that Bellamy’s pie?

(With apologies to Pitt’s speech of 29 March 1786)

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Part One

Introducing Debt

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Chapter 1

The Official Line: Plug the Hole Slowly

Following the measures the Government has taken, the path set for fiscal policy is now consistent with the UK meeting the European Union’s Excessive Deficit Procedure recommendation to reduce the Treaty deficit below 3 per cent of GDP in 2014-15. The OBR projects that the Treaty deficit will fall from 11.4 per cent of GDP in 2009-10 to 2.6 per cent of GDP in 2014-15, and that the Treaty debt ratio will be restored to a downward path from 2014-15. - Treasury Forecast, Budget 2011

The OBR is the Office for Budget Responsibility: a fresh invention and thus some time off from following the fate of the Holy Roman Empire (neither Holy, nor Roman, nor an Empire)

Reversing the historic rise in public debt will strengthen the UK’s medium-term growth prospects, with recent studies showing that high levels of debt damage growth through a number of channels, including by reducing national savings, increasing levels of taxation and by increasing uncertainty. The Government’s fiscal plans ensure that debt as a percentage of GDP is set on a downward trajectory in 2015–16 - Treasury Red Book, 2012

In the course of this book we are going to be talking about some very big sums. Let’s put the most important one right at the very beginning.

How bad is the national debt? Well, we hit a complication straight away as there are different figures out there, counting debt in different ways depending on what you see as ‘on the books’ and what is ‘off’ them.

For now, let’s stick with an authoritative, professional and intrinsically neutral source: the House of Commons Library. Not everyone agrees exactly with the figures, but they are in the same ball park as everyone else.

In late 2011, it published a review of the situation as it then stood. It summarised the situation as follows. In 2011/12, government revenue was forecast to be £576 billion while government spending was forecast to be £703 billion. The deficit was therefore forecast to be £127 billion. Borrowing would finance around 18%, or nearly £1 in every £5, of public spending in 2011/12. Borrowing of £127 billion is equivalent to just over £2,000 per head of UK population. It is similar to the amount of public spending on health.

Borrowing is in the nation’s blood of late. That might not be a problem as a tool to manage your finances over many years, but when out of the past forty years only seven have seen a surplus, then there is something dreadfully wrong with the public accounts. Here’s a frightening chart from the Commons Library paper to show it. Remember that the ideal is to be in a cave deep below ground, showing you’re making a tidy profit. A Dutch landscape just below sea level with occasional dykes would be welcome. But this looks very Alpine: beware of avalanches.

Note the Eiger in the middle there, which coincides with John Major’s Government. Debt isn’t just a party political issue and Labour’s fault. The shock to employment figures in the wake of Black Wednesday happened under a Tory Government (albeit pushed by opposition party conventional wisdom on joining the Exchange Rate Mechanism in the first place), and it brought with it increased social security costs as businesses failed, that were financed by debt.

The problems began when public spending went up, while the actual rate of returns for the tax take went down. It’s part of the old economic trap where government takes people’s money rather than letting them create more wealth that could in turn be taxed on an enduring basis.

Here’s another frightening diagram from the report. Follow the dotted line of expenditure as it towers over the solid line of government revenues and it shows the slag heap of our public finances;

In short, over Labour’s first term government over 1997-2001 it began by keeping the country in the black by raising tax money and keeping a lid on public spending in comparison. The economy was growing, and spending plans were established at a vaguely sensible rate.

Hussah!

But after a couple of years this stopped. Cynics suggest that this is roughly around the same time that the Chancellor was freed from spending commitments from the previous government. This is also the time when the government started going completely bonkers in signing up to all manner of massively irresponsible PFI deals, hiding the true scale of their debt.

So come the 2001 General Election, the country was back to spending more than it got in through taxes - and it continued year on year to commit the cardinal spending sin. It frittered away money in the good times that it should have been saving for the bad (i.e. now).

When the financial crisis came, with the housing collapse and the banking rumbles, extra money could come only from adding more, massive, debts to what was already being borrowed. According to official figures from the Government, the level of new money needed for the banking crisis ran to only 5-6% of the country’s GDP. That means the debt crisis was getting worse even without the banking sector’s contribution to our woes.

All this borrowing comes at a cost. Obviously, loans come with interest (otherwise, no one would lend you the money). Paying off loans means you end up paying more than the amount you borrow, even taking into account inflation. To repay the loan in future years, you therefore have to cut what you would have otherwise spent on your normal items of expenditure.

To put it another way, if you borrow a tenner this week and repay twelve quid next week, that two quid has to come from somewhere. But you’ve only bought ten quid’s worth of whatever to show for it.

In 2011/12, the UK’s debt interest payments were forecast to come to £48 billion – that’s seven per cent of the Government’s budget. This is larger than the amount of money spent on defence or transport.

This is, literally, hods of money. We estimate that you can get a fraction over 11,000 individual pound coins on a commercially-available builder’s hod (11,016, in fact, with a decent sense of balance). If you wanted to build yourself a structure physically made from these pound coins, the 2011/12 debt interest payments would give you over 4.3 million hods of coins to work with. And as the hods would weigh 456 million tonnes, you’d better put the odd pile aside to compensate for repetitive strain injury claims.

In physical terms, you would be building enough monetary masonry to make a ten foot wall high that could stretch 693 miles. Make it six ‘coin bricks’ thick and if Scotland goes independent, you could recreate Hadrian’s Wall in pound coins. That £48 billion of debt repayments is the price we are paying for the failure of past governments. It means money that isn’t being spent right now, today, on areas that people are complaining about today.

That figure is going to get bigger in the future the longer it takes to cut the deficit. The more our leaders loiter in getting spending back into the black, the less money they will have to spend in future years. That’s why cutting the budget now is so crucial; cuts now save bigger cuts tomorrow. It’s a simple choice: cuts or bigger cuts.

To put some absolute numbers on this concept, let's look at how an increase in interest rates would increase total debt repayments over the next five years or so. An increase in interest of 1% would lead to £0.9bn extra payments in 2013/14, to £2.6bn in 2014/15, £4.4bn in 2015/16, £6bn in 2016/17, £7.5bn in 2017/18, giving a whopping total of £21.4bn over the period 2013 to 2018. An increase of 2% would double those figures and an increase of 5% (not inconceivable given the current low rates of interest) would give an eye-watering £111.1bn of extra interest payments of the five years. (Source: Treasury Red Book 2012).

A phrase to remember ... Deadweight debt.

This is a form of debt whose repayment does not constitute a lasting investment. For instance, buying a set of curtains on a credit card at 17.5% of APR. What you pay above the actual purchase price of the curtains - back to the credit card company - to you is deadweight. Taking the analogy a step further - if you had bought the curtains when drunk, but when you sobered up you found that the curtain design of kittens to be repulsive and in the absence of any refund you had to then offload it, the whole cost would be deadweight debt. Whitehall is historically bad at spending public money efficiently, even if it has identified a measurable return on money spent. The amount of deadweight loss created by government running a deficit falls somewhere between the APR cost and the kitten disaster.

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Chapter 2

Not Just the State

We live in a world of debt. All around us, ledgers, accounts and files hold the records of money owed, for services and goods received. Some of this is extremely short term and comes in small sums. If, by happy circumstance, you live in a part of the country where milk bottles remain where they have been deposited, molested by tits rather than drunkards, then your milkman holds your debt. Or again, it could be that your local newsagent tots up a bill over several weeks’ worth of newspaper deliveries. Perhaps you get on really well with the guy who runs the local pub, and he lets you run a small tab. The point of these microdebts is that they are there to make life easier, rather than to defer end payment.

There are also the bigger household debts. Want to buy a new tv? 0% APR for the first twelve months allows you to repay in easy instalments. A special deal here and there allows you to break down buying, say, a car by dividing the costs into segments taken off your current income rather than from savings you would otherwise have to wait to make.

Then there are the bigger debts. There comes a point where the seller can no longer absorb the cost of your late payments because it comes out of his profit margin – after all, if you buy a gubbin today, and finish off repayments at zero rate of interest in five years’ time, a half decade’s worth of inflation will have kicked in by the time of final settlement. APR, the Annual Percentage Rate added to the bill, covers that cost. Of course, in a bad deal the APR will far exceed the actual inflation rate so in effect you are merely paying a masked higher end cost – but that is the real price of getting your fantastic and probably unnecessary gizzit impatiently now on the never-never instead of saving up for it.

Consumers, of course, have a choice. We can either decide we need that washing machine now, and pay through the nose for it over the next year; or we can save for a year and get it cheaper later. It says something about our age and our society that so many people prefer instant gratification. But some forms of debt are more fundamentally built into our society.

* Housing is the biggest example of this, as these figures show.

* £1,454 billion - Level of UK personal debt as at February 2011

* Nearly one and a half trillion pounds: The amount in plain English

* £1,242 billion - Amount of that which was mortgage loans – secured credit

* 85% - Share of personal loans that are in property (which at least means there’s an asset involved)

* £57,697 - Average household debt including mortgages

* £8,428 - Average household debt excluding mortgages

* £66.3 billion - Personal debt repayments in Britain over 12 months

* £2,126 billion - Official government prediction of the level of personal debt in the UK by 2015

From this, we can deduce two main things.

In the first place, the British people are heavily in personal debt, and this is a condition that is going to get substantially worse over time. This is mostly due to people wanting, quite reasonably, to own their own homes rather than fork out for rent without seeing any lasting return. Houses of course are inherently expensive (unless you want to live in a Tokyo-style box that would otherwise barely fit an office shredder), and over the last decade and a half we have been living in a housing bubble, which means the sums that we need to find are now massive when compared to personal income.

But as these costs are now verging on or even trespassing beyond what is reasonably affordable, it means that personal wealth within the economy has become increasingly linked to the debt issue. This has massive consequences for the long-term well-being of the economy as the housing bubble finally pops. But equally importantly, a debt-reliant domestic economy means that adding further debt is not a solution to national problems.

Let's look at one example of personal debt that turned into something of a basket case. In 2006, Farepak collapsed. The company operated as a form of investment company, taking subscriptions over the course of the year, which come Christmas would be turned into a hamper or a gift certificate, to make the season jolly. For a number of years it worked as a sensible method of solidly putting money to one side and making provision for the future rather than getting into debt. However, a savings scheme turned into never-never land for a flailing management. Its eventual failure was particularly poignant given that it catered in particular for breadline workers, allowing people to plan their finances sensibly.

But on another level, it was also a symptom of the nature of the public’s financial woes. It failed when retail confidence in the voucher system of similar companies collapsed, meaning a confidence crisis triggering a domino effect. It failed when HBOS - including the Bank of Scotland - withdrew its support for the company’s business plan, reportedly questioning some aspects of its acquisitions (just as would later happen to some of the banks themselves).

It failed with large amounts of paper debt issued by the company (in the shape of real and pending vouchers) that were not backed up with sufficient assets, since the parent company was itself in debt. Reports also suggested that finances may have been shifted between associated companies, effectively masking the real debt (all not unlike what the Government had been doing).

Of course, the company was in it to make a profit. How much a saving those who took part would have made by regularly saving the same amount in a bank account, gaining the interest, and doing the shopping themselves is hard to say. This is where savings rather than loans can make a difference. Even the debt handling itself fired up bitter controversy. The fees paid out to the people handling the company in administration and liquidation ended up at over £8 million; more than the payouts to outstanding customers.

But the company’s collapse demonstrated that savers were not immune from difficulty. Today’s turkey could be tomorrow’s life savings, if only people would take note.

This book is, however, mainly a book about national debt. It is how, and why, successive governments have failed to address the crisis that is crippling this country and the West more generally, with a few rare and happy exceptions - which will probably see an increase in passport applications as this century progresses. National debt is bad enough; national debt coupled with huge personal debt within the nation means a problem that can only be solved by fixing what is bust, rather than raising taxes from people who essentially don’t have the spare money to pay.

Several years ago, I co-wrote a book with Matthew Elliott on the level of government waste in the UK. We worked out that £82 billion was being wasted by the public purse. We subsequently revisited the figures and found the sum had by then increased to a shocking £101 billion. Note that this was the amount being wasted in a given year, from the national budget. At the same time, the government was running a massive deficit and had become addicted to trying to cover it by introducing scores of new taxes. If these taxes weren’t quite illicit, they were certainly not accompanied by the triple launch of Treasury press releases that would often flow from spin doctors’ faxes during those days.

Cut the waste, cut the expenditure, cut the debt: it was a simple principle, and remains so today. However, the problem is that once anyone starts looking at any cuts, it is all too easy to panic people that ‘essential services’ are being slashed. Never mind, mark you, that a particular budget line may have doubled or tripled over a decade with only a limited improvement in the quality or quantity of service; or that much of the money went into increased salaries; or that a proportion of the funds went into schemes that auditors have recognised were a waste of space, triggered simply because managers felt they had to spend what was on the books. The issue of public waste remains very much on the reform agenda, and a key solution to our problems today.

Time to look at one example of a failed reform.

The Department for Education has for several years run a programme called Bookstart. This emerged from a series of schemeslater funded from EU grants, which were then developed by charitable donors. From around 2000, however, the Government decided to get involved. In July 2004, Chancellor Gordon Brown, announced that there would be free books to every child at three key stages: Bookstart Baby Pack for children up to 12 months, Bookstart+ for toddlers, and My Bookstart Treasure Chest for 3- to 4-year-olds.

So initially, private funds had been supplying support to targeted communities, where it was felt parents could not afford, or (anecdotally) would not be encouraging, their toddlers to read. What happened next was that the Government stepped in to