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2009 September 28 Monday
UK Headed For Big Budget Cuts

The British government is going to cut spending by 10% over 5 years.

Britain is facing the tightest squeeze in public spending since the 1970s, after leaked Treasury documents showed a major deterioration in the nation's public finances, the Institute for Fiscal Studies will warn tomorrow.

In a blow to Gordon Brown days after he relaunched his premiership by finally admitting that spending would have to be cut, the IFS will confirm Tory warnings that the last budget in April failed to reveal the depth of the public finance crisis.

The IFS will release its latest commentary on Britain's public finances in the wake of the leaking to the Tories of Treasury documents which showed that departmental spending would be cut by a total of 9.3% between 2010 and 2014.

While we are still at the stage in the United States where the US government thinks it can continue on a drunken spending bender at some point the US government is going to go so far that the world money market is going to deliver a real drubbing. The US government can't continue on its current path. Eventually the United States will be as vulnerable to market pressures as the United Kingdom.

The UK spending is peaking and heading downward.

Whitehall spending on public services could fall to 20.3pc of gross domestic product (GDP) by 2017, the same level as 1998, the IFS finds, unless the Government imposes further tax increases or cuts in welfare payments. Departmental spending this year is expected to amount to 26.1pc of GDP, a peak since Labour came to power.

When China stops lending to the United States the day of reckoning will arrive.

Share |      By Randall Parker at 2009 September 28 12:56 AM  Economics Political


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Comments
Wolf-Dog said at September 28, 2009 8:13 AM:

The cause of the coming cutbacks in UK is the expanding foreign trade deficit of that English speaking country:

http://www.telegraph.co.uk/finance/financetopics/recession/4227166/UK-trade-deficit-balloons-to-a-record.html

The only way the US can survive is by becoming economically independent from foreign trade deficit. This means re-industrializing the US. This can be done, but there must be a massive government policy that nurtures industrialization, by means of special tax credits for depreciated equipment that goes way beyond current policies, more government loans and scholarships for science and engineering students.

Also, as a strategic step, there must be a new government policy to establish a minimum of electronics factories inside the US, to manufacture critical circuits, chips, laptops, printers, etc, which are currently being built abroad.

In any case, if foreign trade is balanced, the US will survive.

Rohan Swee said at September 28, 2009 12:09 PM:

In any case, if foreign trade is balanced, the US will survive.

Well, yeah, if we're not going to continue our current process of morphing into Third-Worldistan, trade must be balanced. But as far as I can see, the people who control our trade policy have not the slightest real intention of changing anything, and nobody in Congress has the requisite combination of brains, stones, and clout to change that. We're following the same economic trajectory as the UK, even without the more extensive welfare state. The usual suspects and their useful idiots will still be screaming "protectionism!" and "Smoot-Hawley!" when we've got nothing left to export but corn and child prostitutes.

Also, it'd be fine to have more grants for engineering students *if* we made a commitment to sane tax/trade/industrial policy. Simply funding more tech degrees with no change in policy will only result in an an increase in un/underemployed engineers with crap career prospects - or more foreigners getting their educations subsidized by American taxpayers who can't afford to send their own kids to college. We didn't lose our industries because we didn't graduate enough engineers, no matter what Tom Friedman thinks.

Engineer-Poet said at September 28, 2009 12:32 PM:

Tossing out lots of immigrants would help our budget too.  See this analysis of Obamacare.

Wolf-Dog said at September 28, 2009 12:39 PM:

"Also, it'd be fine to have more grants for engineering students *if* we made a commitment to sane tax/trade/industrial policy. Simply funding more tech degrees with no change in policy will only result in an an increase in un/underemployed engineers with crap career prospects - or more foreigners getting their educations subsidized by American taxpayers who can't afford to send their own kids to college. We didn't lose our industries because we didn't graduate enough engineers, no matter what Tom Friedman thinks."

-------------

You are absolutely correct... When I suggested that we should train more nerds, this was within the same context of government policy for reindustrialization.

Now let me explain how this free trade is not so free: The usual argument in favor of the trade balance is that the prices of imported goods are low and that this helps the average American consumer. This is highly exaggerated because although the manufacturing cost of the goods made in Asia are certainly way below the cost of manufacturing in the US, at the retail level, the final purchasing price is only slightly below the competing American goods, so that the big importing companies are pocketing the difference, leaving very little net benefit for the American consumer. The damage is that the American industries are perishing or not growing.

Secondly, the ones who are in control of the US trade policy, are obviously the business interests who directly benefit from this kind of trade deficit, but ultimately, the politicians will be forced to take action because it will become impossible to continue this policy. In a few years, we shall see more protectionism. Note that the UK foreign trade deficit started skyrocketing especially after the US dollar dropped too low, making British exports to the US more difficult. Thus without a trade surplus with the US, the European trade deficit overall would start become bad enough to start riots over there, forcing their politicians to impose anti-Asian tariffs. The same trend might soon start in the US.

Eric Johnson said at September 28, 2009 1:52 PM:

Why wouldn't manufacturing in the US increase naturally in about twelve years, as China starts demanding more goods, and stops supplying so much cheap high-quality labor? It's Mao - and Deng, by reversing Mao's nonsense so expeditiously - who created this unnatural situation where a billion high-IQ, high-diligence people are suddenly available to work for 20 bucks a day.

Daniel said at September 28, 2009 8:45 PM:

>>You are absolutely correct... When I suggested that we should train more nerds, this was within the same context of government policy for reindustrialization.

Train more nerds to do what? Go into Wall Street?

I read an amazing statistic (can't find the source, it was on the net, but I neglected to copy it): 30% of the graduates of America's premier technical university (Cal Tech) went into finance last year. Similar figures pertain for America's other elite universities I am sure. What a waste, but it is understandable. There is Soooooooo much money there for the taking in the Wall Street game, especially if you are smart with numbers. You want to do something for America? Kill Wall Street, or at least reduce its size by 80%.

And this wouldn't require any coercive measures at all. Wall Street would naturally shrink if we forcefully eliminated the direct and implied subsidies that Wall Street has been receiving. We subsidize them with cheap credit - inflating our currency in the process. We also have been subsidizing them with an implied backing all these years while they recklessly bet the grandkids' patrimony. What to do? 1) Enforce historical equity to capital ratios. 10 to 1 asset to equity is prudent and profitable. Prohibit this insane 15, 20, 30, 40 to 1 that we have seen over the past 10-20 years. 2) Mandate that Wall Street firms are constituted as private partnerships. No public capital. Let the owners have ALL their own equity at risk. Reckless practices will disappear overnight. We have never had a scandal out of Brown Brothers Harriman, the last Wall Street Partnership. No wonder, the partners' money is at risk every day.

Too much IQ has gone into Wall street and it's ancillary businesses such as lawyering. Take away Wall Street's subsidies, thereby forcing it to shrink. This will redirect America's smarts towards productive endeavors.

Save America, Kill Wall Street.

Randall Parker said at September 28, 2009 10:15 PM:

Regards grants for engineering students: Instead of spending more on education we should automate more of it to radically cut costs and open it up to easier access.

Why have to go to a large lecture hall to listen to someone (often a foreign grade student with a poor grasp of the English language) way up front give an uninspired lecture on calculus or physics or the basics of mechanical engineering? It would be better if a few dozen profs considered good at a subject were all paid to give video lectures. Governments could buy the rights to the lectures and make them free to download.

Then there are tests. Why not have some standard tests available for everyone to test their knowledge of lower division science and engineering courses? You could take those tests on web sites to find out if you know enough. If you do well then go to a room to take a proctored test.

Do not throw more money at bricks and mortar schools. Bring education to anyone with a computer. If they want someone to answer questions then the question answering ought to be separately purchasable.

Clarium said at September 28, 2009 10:16 PM:

The UK will benefit from a tax cartel since it needs to raise taxes. A tax cartel would remove some of the pressures for lower taxes, so the UK can raise taxes.

Also, the UK would also benefit from a tariff spiral too since protectionism resulting from a trade war increases the power of the nation-state relative to stateless elites.

A.Prole said at September 29, 2009 4:37 AM:

The New Labour government of 1997 to present has presided over a massive decline in millions of productive indutrial jobs that was masked by an equal and opposite increase in public sector employment - the difference being that the government jobs actually destroy wealth rather than create it.
Tax revenues from the bloated financial sector allowed this dysfunctional state of afairs to continue - now that tax money is gone, and the emperor is standing nude and ashamed.

Enough said at September 29, 2009 12:37 PM:

-Then there are tests. Why not have some standard tests available for everyone to test their knowledge of lower division science and engineering courses? You could take those tests on web sites to find out if you know enough. If you do well then go to a room to take a proctored test.-

With this system, it will be impossible to hurdle NAMs and give them degrees. That's what higher ed is all about these days...Taking care of parasites is what is bleeding this nation to death. Just watch that video of what those blacks did to that other one in CHI. We obviously need more money spent on education for them!

sg said at September 29, 2009 12:57 PM:

"You want to do something for America? Kill Wall Street, or at least reduce its size by 80%."


How do you kill Wall Street when there is enormous demand for investment vehicles? It seems our population is aging and wants to save for retirement. Those selling investment products get paid whether investments pan out or not.

I would like to see what others think.

Daniel said at September 30, 2009 7:58 PM:

>>How do you kill Wall Street when there is enormous demand for investment vehicles? It seems our population is aging and wants to save for retirement. Those selling investment products get paid whether investments pan out or not.

Wall Street has grown to such a reckless and dangerous dimension not because of demand for it's products. It has grown due to the fact of so much capital is pushed into it's operations. And this excess capital is plowed into products that don't help anybody except the people selling them. At best, 80% of what Wall Street does is redundant. How many ways are there to beat the markets? Not many. There is room for a few clever and industrious people to beat the markets but on average (and that is what really matters) it can't be done. Beyond a certain level of gaming, the market extracts a zero-sum result. It is an illusion that the mass can invest itself to returns beyond the mean. A few years back the Republicans were pushing the crap that social security should be invested in the markets. With all our problems we now have imagine how much worse things would have been if that nutty idea came to life.

The excess capital comes from 2 sources. 1) The fed allows financial institutions (previously only commercial banks, now investment banks too) to borrow cheap money, money that they turn loose on traders and investment bankers (either in house or through loans to hedge funds) who make reckless bets on market making. 2) The regulatory agencies have unleashed banks from the strictures of prudent equity/asset ratios. Traditionally this ratio has been around 10 to 1. Over the recent past this has gone as high as 40 to 1. This is reckless in the extreme. At such ratios it is not a questions of whether there will be financial collapse it is only of question of when it will happen.

Solutions. Bring back reasonable equity/asset ratios. Stop the Fed from monetizing debt. Force investment banks into private partnerships. Simple and reasonable measures. Don't forget, Wall Street does not create wealth. When properly executed, banking facilitates wealth creation as a service to the productive sectors of the economy. Beyond a certain level of support to industry banking is pure friction. Wall street no longer exists primarily to serve industry, it exists in its own right. Wall Street leaders have really swallowed the fallacy that they actually create wealth. They don't. What they call profit is money unjustly siphoned from the rest of us. And this leaves aside the problem that so many of the nations brightest minds are drawn into such destructive activity. Save America, kill Wall Street.

Rob said at October 1, 2009 7:17 AM:

On top of this, the U.K. (and the U.S.) are committed to the economy-destroying cap-and-trade policies.

Michael L said at October 1, 2009 10:01 AM:

Wolf-Dog,

so you claim that there is little savings in buying Chinese imports because retailers skim too much? If so, why don't you (or some other new entrant in the market) start importing and selling this stuff with lower markup and profit massively? Something doesn't square here, given the fairly competitive landscape (what can be more competitive than retailing and import/export?). Or is there really some huge market failure happening?

I am quite open to arguments about total cost of ownership, poor quality etc, not to mention the larger strategic implications of what is going on. But this particular claim of yours sounds dubious to me, at least in cases where "brands" are not involved. Well, I personally don't wear "Nike" sneakers, I wear regular sneakers thank you very much :). I would imagine that majority of normal people do likewise.


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