Let’s take a toy model analogy.
I earn £30,000 per year and spend £25,000 on consumption and £5,000 investing in the future.
I entrust my financial affairs to a Labour Chancellor who assures me I can spend £30,000 per year on consumption and £5,000 on investing in the future because “I’m worth it”. So I borrow £5,000 a year for 10 years.
For 10 years I feel like I’m earning £35,000 per year. I consume £30,000, invest £5,000 and life feels pretty good.
What I’ve not spotted, until it is too late, is that after 10 years I owe £50,000 and the interest is costing me 10% or £5,000 per year.
The financial crisis hits me, causing my income to drop to £28,000 (drop in GDP) and my consumption has increased to £32,000 per year (to pay increased unemployment benefits). I am now also paying £5,000 in interest.
My consumption (£32,000) + interest (£5,000) is £37,000 without paying off any debt. My costs are now £9,000 more than my income (£28,000). And I have no money for investment.
Because I feel like an incompetent fool I hand over all my finances to a Coalition Minister.
He painfully cuts my consumption to £25,000 (what it should have been) but I still have to pay £5,000 interest on the debt and therefore need to borrow £2,000. I have no money for investment. Debt rises from £50,000 to £52,000.
Immediate effect: I now have £5,000 less per year to spend on consumption and prices have risen – so I feel much worse off (“cost-of-living crisis”) – and my debt has still gone up by £2,000 therefore my interest payments rise by another £200. I still have no money for investment.
In the Autumn statement my income goes back to £30,000 (GDP growth) giving me an extra £2,000 to spend. £200 goes on interest and £1,800 on investments.
Compared to 10 years of Labour Government this is how I feel:
1. My consumption has gone from £30,000 to £25,000 despite inflationary price increases, so my standard of living has fallen and I worry about paying fuel bills.
Of course my living standard is falling! I’m comparing my current standard of living to a period when it was held artificially high by borrowing!
2. My investments have gone down from £5,000 to £1,800 which will slow the pace of future economic growth.
3. Interest is now £5,200 and rising
4. Deficit is down from £5,000 to £2,000 but…..
5……my debt is still going up.
Can anybody spot where the problem started?