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Cuts, Cuts, Cuts

Posted on Feb 10, 2011 by Sandy Finlayson  |

I recently listened to an outstanding but very sobering assessment of the state of the nation delivered by Jon Moulton who is one of the leading figures of the private equity world. I first heard Jon describe a collateralised debt obligation in a presentation about 4 years ago. I then watched him present an hour long programme on Channel 4 about 3 years explaining how credit default swaps had the potential to bring down the financial system. He showed extraordinarily perception and is one of the few who saw the crash coming. However, the powers that be refused to listen to his dire warnings. Unfortunately, we are confronted in both the print and broadcast media by emotive and ill-informed debate about cuts. None of the commentators appear to be interested in understanding or explaining the hard facts. However, for those who are interested, here they are:- · This year the country will spend about £4 for every £3 which it raises in tax. If it was a business, it would be losing 25% of its turnover which, as those of us in business all know, is completely unsustainable; · The shortfall will have to be made up by borrowing which will reach about £160 Billion this fiscal year; · The Economy will be deficit funded for the life of this Government and the national debt will increase by about £450 Billion over the life of this Government; · At the end of this Government the national debt will stand at about £1.4 Billion. If provision was then made for the vast public sector pension liability which is completely unfunded, the total would rise to about £4.8 Trillion; · This year we will spend more on welfare than we will raise in income tax; · Public sector expenditure increased at 5% per annum compound above the rate of inflation during the last 10 years of the previous Government; · The overall decrease in expenditure is very modest considering the amount of the deficit. The Government’s business plan anticipates (perhaps optimistically) that the deficit will gradually be managed down through economic growth and increased tax receipts; and · Our politicians and our political commentators owe it to us to understand and articulate the facts clearly and concisely. We do not need to be protected from the truth! About 2000 years the Roman author Pliny said that “the coffers of the Empire were being depleted of gold and silver by the desire for goods from the East”. How little has changed in the intervening 2000 years! We now need to take less of an interest in Chinese consumer goods and more interest in investing for the future. As Jon Moulton so wisely put it – “Our kids don’t deserve our debts”! Sandy Finlayson Senior Partner

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