The £10 Trillion Debt and Flat Tax.
PwC has just published the result of an in depth financial survey which confirms what I and others have been saying since the start of the financial crisis, except their figures which are worked from scratch, are worse than mine, which came from the IMF. I have stated that the total of all debt, private, public and commercial for the U.K is 450% of GDP against a world average of about 92%. PwC say that in 2009 it was 540%.
They go on to say that this will reach £10 trillion by 2015 and be a millstone round the neck of the economy for more than a generation. Servicing it and repaying it will inhibit growth and, as interest rates rise, as they will, more and more will be sucked out of the economy to pay the rising bill. This is stating the obvious and it is the most significant underlying issue with which we will for years have to grapple.
There can be no recovery by increasing long term debt either at a government, private or personal level. The natural tendency for pople and companies to reduce borrowing which has reduced demand for loans is, in this context a good sign, as are the much tougher criteria for mortgages. Not only do we have to gradulally reduce this debt mountain; we have also to reduce by a margin the cost of housing relative to earnings and we have to expand the economy without another borrowing binge. There are signs that this is what is slowly happening, part due to government policy but a good deal because people at all levels are coming to their senses. Oddly there are signs that some bankers, politicians and economists are slow to grasp all this, but I suppose if they had understood we would not have had the crash.
Another problem yet unresolved is that income tax was allowed under Labour to drift too low from the sounder rates of the Thatcher era (she was the arch tax cutter but she knew when to stop) and putting them back up will be difficult. There then comes all the argument about rates versus volume about which there is a lack of informed consensus, though no shortage of emotional outpouring. In my book, 2010 A Blueprint for Change,I advocate a switch to a single flat rate of income tax which is operated in conjunction with higher personal allowances and the rate of vat. Having determined the total revenue required to pay for government spending, using these three elements, there is almost an infinite variation of how to achieve it. This provides the opportunity to apply stimulus or restraint, wherever adjustment is needed, in a joined up fashion unknown hitherto.
Politicians have not yet managed to get their minds around this opportunity yet, but the pressure for something on these lines is rising. Sooner or later it will come to pass. Meanwhile the need for economic re-strucure becomes ever more apparent. Recovering from the unsustainable borrowing binge which took off at the millennium, which fed into not just asset inflation but assets without credible value, will take as long to pay off as the whole of WWII. We paid the last tranche of that in 2006.