21st Century Mr Micawber: UK economy "mess" explained as family budget

Dear Jayne, Claire & Tom

A couple of years ago, I read a really good book called 'Letters to My Grandchildren' by retired politician Tony Benn. It explained in simple language some of the big issues from my childhood and teenage years: The Campaign for Nuclear Disarmament, trade union values, social welfare policy, etc.

It gave me the idea to start this blog called 'Letters to My Children' in which I can witter on about things that have taken me 54 years to make sense of, which I really should have understood at least 25 years ago. Here is my first attempt...with love, Dad.

21st Century Mr Micawber: "Annual income £40k, annual expenditure £39k, result happiness. Annual income £40k, annual expenditure £45K, result misery."¹

Because I'm your dad, you will think that I'm either brighter or more stupid than I really am. Whatever the reality, the best assumption is the latter. As evidence, take my lack of understanding about how the UK economy works. Along with more than 30 million others, you and I are compelled to give our government a slice of our earnings in order to run the country. But how does it work?

Mostly, I don't know. But thanks to the Daily HateMail of all things, I have a better idea today than before. They identify that the government's income, raised from taxes including the income tax and National Insurance that we pay, corporation tax paid by.......err, corporations (excluding the likes of Amazon, Google, Vodafone and Starbucks, of course), and VAT added to the cost of most things we buy, is about £616 billion (i.e. £616,000,000,000 in 2012/13.²

Meanwhile, current Government spending is about £720 billion. And our national debt - the long term accumulation of what we as a country have borrowed from banks, financial institutions, other countries, etc and have yet to repay - is £1.2 trillion.

However, your clever/stupid dad can't make sense of all those zeros. But by scaling those numbers down to sums we can make sense of, a parallel can be drawn with a family's household economy. For example, if our government was a family with £40,000 a year earnings, then it's current spending would be £45,000. The difference is what politicians and economics journalists refer to, but don't explain, as 'the deficit'. A family in this situation would have to find the the money to cover this deficit, typically from credit cards or other loans. For the government, they find ways to add it to the national debt, which scaled down to this family example would stand currently at about £80,000.

Now, ask yourself how you'd feel with an 80-grand credit card debt that you're not only unable to pay back but is actually growing by 5k a year. For the country, that's only part one of our current problem. Part two is that despite the cutbacks we hear about regularly in the media, government spending is still forecast to increase each year. So too is the government's income from taxes, but not by enough to catch up with spending. So our national credit card faces a continued battering, with national debt forecast to rise to £1.6 trillion by 2018. In our family model, that would be a jump from £80,000 to £106,000 owed to Mr Visa, Mrs Mastercard or, much much worse, Dr Wonga.

But our Chancellor of the Exchequer's problem doesn't end there. Part three of our national financial mess is that we cannot safely assume interest rates on borrowed money will remain as low as they are now. A rise of just one percent would increase government spending by £12 billion a year from interest charges alone. In our family model, that would be an extra £800/year to find, which because we're already living beyond our means will go straight onto the credit card balance we owe. OUCH!

1Paraphrased from Charles Dickens, 1850. David Copperfield. Original publisher, Bradbury & Evans, London.

2Hugo Duncan, 27 June 2013. Austerity? It's hardly begun. Daily Mail.