Learn me about Debt and Deficit

Derek_RDerek_R Posts: 1,698Member
edited August 2016 in Totally Not Guitars
Learn me about Debt and Deficit.

If I understand rightly this country has a budget deficit of around 70 billion?  And George O / Ed B reckons that they can bring this back into surplus given another term or a new term. But...our debt is measured in the trillions, I believe. Or at least over one trillion. So how does one reconcile moving into surplus with the fact that we won't actually be in surplus for many generations to come, if ever? Is it not like me saying, "Yeah I owe 50k on the Visa card, but this month I reduced the amount I put on there compared to this time last year, so aren't I doing well? And I reckon in another four years I won't be adding any more to that card - so aren't I doing really well?" ?? Meanwhile the interest rates are racking up and I still have to pay off the overall debt one day. Or am I missing something? I get debt lasts a long time - didn't we just pay off some World War One debt? (Although I must admit I didn't understand that either - it sounded to me like we simply wrote it off, rather like me dropping a line to the HSBC  saying "that five k I borrowed for a Capri in 78 - let's forget it, shall we?). And I guess there's probably a lot of debt from WW2 and so on...but no-one seems to mention it. This is probably why I'm not an economist or politician.


  • Reg SoxReg Sox Posts: 3,121Member

    You've basically got it.


    Think of the debt as described as your mortgage.  If you have to borrow more money to pay your mortgage (and other household bills) then you are running a deficit.  If you have money left over after paying your mortgage (and paying other household bills) you can use the surplus to save money or pay off your mortgage early, or if you are a politician, use it to reduce tax to buy votes.


    Debt is serviced based on regular payments that includes the capital plus interest, again a bit like a mortgage.  You can also recycle debt buy selling additional bonds that will pay out a lower rate of interest and use the funds to pay down debt early on bonds that have a larger interest payout commitment.  Again, this is a bit like swapping out your mortgage for a better deal.  Most people run a bigger mortgage in comparison to their earnings than the Government does in comparison to GDP.  It's just a highlight at the moment due to recent (last 8 years) borrowings having been at higher levels and at higher than normal interest rates, which does take money away that would normally be available for public services.


    You think our debt is big?  Try the US:




    To put our debt into context, the company I work for has an annual turnover approaching 10% of the UK national debt.  You will find some scare mongers on the web that state the UK "debt" is over £4 trillion.  But this is just bollocks because it's based on other future liabilities that include state pension commitments.  But pensions have always been paid out of NI contributions made in the years that the pension commitments need to be paid.  It's a cashflow discussion, not a debt discussion.  It's a fallacy that a person's NI contributions pays for their pensions.  Everyone's NI contributions pays for the pensions of people during the years the NI is paid - it's not held in some magical interest bearing account and saved up for our future use.  For our pensions we will be reliant on the NI contributions of employees who are working when we are retired.


    Hope that helps?


    Edit:  BTW, I think the origin of the doomsday £4 trillion+ debt scenario was a long video (that I actually sat through) from a Financial Advisor company (can't remember which one).  The problem is that it was quite convincing if someone didn't understand the realities and having set the scene made lots of unfounded claims that a future Government would tot up your net worth and make very large tax claims on you, and unilaterally raid your bank account.  It was done pretty convincingly unless you bothered to then check out the facts and reality.  If you stayed right to the end of the video all it was really trying to do was sell you some off shore money hiding scheme that all seemed pretty dodgy - of course at a good management fee for them.  Unfortunately it appears some of the media got sucked into this without understanding the fact the video was a sales pitch and now it's become one of those urban myths that the interweb helps persist.


    Cheers, Reg.

  • Kevin PeatKevin Peat Posts: 3,146Member

    David Cameron deliberately conflated debt with deficit in one of his major speeches. This was an astonishing mistake for a PM to make - so bad that many think it was a deliberate deceit. 


    Miliband didn't mention debt or deficit AT ALL in his address at the last party conference. 


    Perhaps it's too confusing for both of them !


    Austerity is a fallacy. Our debt has, in fact, gone up to £1.4 trillion (from £1 trillion) in this administration. The real cuts are yet to come and both Labour and the Conservatives intend to make them - of a similar magnitude - during the next parliament. 


    We ain't seen nothing yet. 


    Debt is what we owe in entirety. Very simple. 


    The deficit is the difference between the  current amount of government spending and the amount of income from tax revenue.


    By far the largest piece of the expenditure pie is welfare/health  (excluding pensions) according to a recently released government chart. One wonders the proportion of pensioners who have contributed fully to their pensions and whether or not some of them should be included in the welfare costs too.


    Our debt interest (even at today's easy rates) is far larger than some of our most important budgets including defence and justice; unsurprisingly tax receipts are not keeping up with expenditure - especially if most of the welfare is in-work (low pay) top ups and the recipients are too poor to pull their weight in taxation: 


    New personal tax statements will spell out where tax and National Insurance is spent. This one is for someone earning £30,000

  • Kevin PeatKevin Peat Posts: 3,146Member

    Reg said; "But pensions have always been paid out of NI contributions made in the years that the pension commitments need to be paid."


    This wasn't how it was originally set up and certainly not how it was sold to me. I was expecting a pot to be waiting for me at retirement but am now expecting the due date to be set back and to be means tested despite all the NI contributions I've made - in fact I'm doubtful I'll see any state pension.



    I've always put into a private pension. Sacrificing holidays to do so quite often. I'm no longer sure this was a wise thing to do.


    What they'll probably do is merge NI with general taxation. This will pave the way for them to say "Oh. But you've never paid towards a state pension. You've just been paying general taxation." And so many of us will be denied our pensions and the young-uns won't know any other than 30% direct taxation. I probably won't be any better off than if I'd ****ed my money up a wall. I pity my children's generation. 


    The big issue is the overly generous state sector pensions (far in excess of private pensions.) This is where the 4 trillion of debt comes from (I don't know what it is in fact. Just that the present debt is an underestimate.) It doesn't all fall at once - but with life expectancy as it is it is a certainty that most retired state employees will be drawing it at the same time at some point in the future. Gordon Brown made some wild promises, along with commitments to Private Finance Innitiatives (PFIs) - borrowing to pay for new hospitals and schools, etc. 


    "immigrate people to pay NI"


    And here's the rub. With downward pressure on wages (people competing hard for jobs) a high proportion of those migrants are too poorly paid to contribute sizeable tax or NI payments - by the time they do they'll be pensioners themselves as well, probably drawing more than they've put in !  They are in that big bit of the pie, where in-work benefits are - in other words taxpayer subsidised 'cheap' labour, paid for from taxation against people stupid enough to earn a good enough wage on PAYE and against pensioners too.


    It's like a snake eating its own tail !

  • Derek_RDerek_R Posts: 1,698Member

    I do think the pension system will implode at some point in the medium future. I accept that my 35 years (so far) of paying NI has funded those people drawing a state pension during those 35 years. And I trust that when I get to pension age I will be given the same support by those working and paying NI during that period. And so on.


    But I accept it's a model that can't go on forever.


    So what will happen when the government announce they're no longer going to pay pensions to everyone, irrespective of a lifetime of contributing, and instead provide a pensions to those who haven't made provision for themselves? Won't we get a generation (or several) which says "Sod that. It's fast cars, flash clothes, grand holidays, parties, and buying everything I want, and by the time I'm 70 the government will have to look after me." ?


    Which, in the end, could be an even bigger problem.





  • JockoJocko Posts: 7,060Member, Moderator

    Which reminds me.  I'd better pop down the off-license and spend my Winter Heating Allowance.

  • Kevin PeatKevin Peat Posts: 3,146Member

    Get there with your free bus travel. 

  • Reg SoxReg Sox Posts: 3,121Member
    Originally Posted by Kevin Peat:

    Reg said; "But pensions have always been paid out of NI contributions made in the years that the pension commitments need to be paid."


    This wasn't how it was originally set up and certainly not how it was sold to me.

    I respectfully suggest you are wrong on that fact.  Plenty of people misinterpreted at the time of introduction and ever since.  But it was absolutely never ever set up as an investment fund for future draw down.  Health and unemployment benefits were paid out as soon as NI was first levied, and pensions were paid out as soon as they were included post war - on that basis how could they ever be thought of as an investment for the future?  The person in work has always funded the welfare state for everyone on a real time basis.


    Where I think confusion lies is with the top-up pensions and people tend to lump the two together.  But the basic State Pension has, and always will be, a cashflow based benefit, not an investment based benefit that delivers a future reward.


    I won't bother getting into the politics, because that's not the question Derek asked.


    Cheers, Reg.

  • Reg SoxReg Sox Posts: 3,121Member
    Originally Posted by Derek_R:

    I do think the pension system will implode at some point in the medium future. I accept that my 35 years (so far) of paying NI has funded those people drawing a state pension during those 35 years. And I trust that when I get to pension age I will be given the same support by those working and paying NI during that period. And so on.


    But I accept it's a model that can't go on forever.


    I don't see why it wouldn't go on.  There's going to be a blip due to people living longer.  But whether we like it or not Government (irrespective of party politics) is already addressing that by increasing the pensionable age, which is also in line with people working longer.


    In my opinion the implosion has already happened with the demise of final salary pensions - that was the bit that became finally unsustainable once the decision was made to tax the retained pension pots of those schemes.  I'm already of a generation for whom final salary schemes are just a distant memory.  One very small part of my future pension if a final salary scheme that will deliver me about £100 a month.  Final salary schemes in Government are the last wall in that space to be broken down, and that is already happening.  So the short term issue is that many people have not been making appropriate arrangements to fund their retirement seeing their parents living comfortably without understanding how that has been achieved.  It wouldn't be attractive to the average 14 year old but I see education in this arena as being sadly lacking in Secondary Schools (much like other essential life skills like changing a tap washer!)


    End of the day the Basic State Pension has only ever been a subsistence level payment, not a living "wage".  When it was first introduced in 1948 the weekly payout was 26 bob (£1.30) and if you were married your missus got another 16 bob (or it might have been 16 bob each for a married couple - the tables are that obvious to interpret).  It's sometimes tracked slight ahead of inflation, or behind it, but it's always been at this relative level.  I don't personally see a scenario when the Basic State Pension will change under any of the current mainstream parties.


    Complexities do arise when top-up and earnings related come into play.  Historically it's been extremely complicated with legislation upon legislation imposed on the original pension act.  The current Government, rightly or wrongly, has embarked on trying to simplify the whole mess.  Inevitably some people will win out and some will lose, and there will be some righteous anger and some people will (probably rightly) feel hard done by.  But taking an emotionally cold viewpoint it will again just be a blip in the great scheme of things.


    There's always emotion attached to politics but at the end of the day I wouldn't want to be a politician and have to make this sort of hard decision.  The big problem I have is that I consider the people who want to be politicians in most cases are probably the least suitable for doing so because the bulk of them are driven by their own ideals that they want to impose on the rest of us.  Maybe serving in Government should be a bit more like Jury Service with some tweaks for testing minimum levels of comprehension of how a country runs.


    Cheers, Reg.

  • Derek_RDerek_R Posts: 1,698Member

    I hope you're right, Reg. I'm in a similar boat with just a small bit of my pension being from the old final salary days. I'm still a long way off retiring but I'm saving hard (not necessarily saving lots, just saving hard) to try and ensure I have a decent standard of living come the day. I'd also like to retire in advance of state pension age  - currently 67 for me, but it's edged back a few years already and I'm not holding my breath that it won't move again before I get there. So I'm trying to build up a pot that will make up the difference between my striking my work pension and the state pension kicking in, as neither on their own will support me and SWMBO and the dog (who's on more drugs that Keith Richards in his prime). Can't help thinking that I could buy a nice Stonebridge if I wasn't so bloody sensible.

  • Reg SoxReg Sox Posts: 3,121Member

    I'm the same, but I'm looking to retire at 60.  I've had other opportunities in my life like living as an ex-pat (still paid my voluntary NI to ensure my state pension was protected), and then running my own business that I was able to sell.  Never having had kids is also a massive boost to finances!  We invested quite a bit in our house that we will downsize as well - we've never needed a place that big, and I've taken big advantage of the tax free contributions to my company pension fund.  So we'll pick somewhere cheaper to live, either here or in continental Europe depending on other circumstances, and should have enough to live on.


    Coincidentally, this is all top of mind for me because I had a Financial Planning session with the people who administer our company pension scheme.  This is rich.  I spent an hour going through with the guy about all my incomes and assets and my retirement goals and all I wanted was a reassurance that I was on track.  He wanted to come back to me with a "Complete 360 View" and an investment plan.  I don't want to make any investments.  In fact over the last year as things have recovered I've been liquidising all my investments and putting them into no risk (small) interest bearing accounts.  For the chance to then sell me some investments, for which he would get a fee anyway, he wanted to charge me £2,500.  If he has followed my instructions to the letter he will probably be walking a bit funny now.


    Cheers, Reg

  • Kevin PeatKevin Peat Posts: 3,146Member



    Where I may have become *confused* is that - in order for me to be eligible for a state pension - I must have built up qualifying years of paying in NI. It may not be a 'pot' but it is treated like one by the government. 


    I infer from this that they know I am earning my entitlement rather than being gifted it. Whether or not my pension is paid for by the following generation is immaterial (in fact I think many private work schemes operate this way too.) I started working life believing that I was earning and paying for my state pension. 


    If it comes to means testing and I am to be denied that part of my National Insurance contribution at retirement I ought to be given the right not to pay for it now and be reimbursed that which I have already paid. 


    Otherwise where is the benefit in working hard and taking on great responsibility if:


    A) One's wages are effectively reduced by making one's own pension provision

    B) One is subject to more tax whilst at work

    C) One is penalised at pensionable age by being denied (through means testing) a state pension ?


    Even 'extremist' John Redwood is posting about closing the *inequality* gap, but there comes a point when such redistributive policies disincentivise people from making the extra effort. 'Equality' should barely feature in the Conservative lexicon - 'fairness' is a more worthy aim. 


    It's the inequality gap which motivates people to stretch themselves.


    I hadn't realised you were child free. This probably explains why you seem a lot more relaxed about things than I do. The cost of children is utterly phenomenal and - as a parent - one worries interminably about the future. Also - I have no money for guitars and not much time to do live music !

  • Reg SoxReg Sox Posts: 3,121Member

    Not sure that generating a lot of angst about an assumption that is highly likely not to come to fruition is worthwhile to be honest Kev.  Neither of the two main parties would get rid of the pension, and if they were in coalitions they would be te dominant party and it still wouldn't happen.


    Not sure what the split is these days.  But when I lived overseas and paid my voluntary NI it was only the portion that contributed to my pension rights and was pretty small in comparison to my total NI before I went and after I returned.  Quite right we build up qualifying years.  What is basically says is "you've paid for pensioners while you're working, and that entitles you to have future generations pay for yours".  Seems entirely reasonable to me.


    Private work schemes don't exactly work like that.  The old final salary schemes paid into a fund that was invested, based on a fixed contribution as a percentage of salary.  Some were mandatory schemes, some were elective.  When a private scheme was introduced, unlike the 1948 state pension introduction, a company scheme didn't have to immediately start paying out to a bunch of existing pensioners.  Your contribution over a number of years defined your percentage of final salary, maxing out at typically 2/3rds or 3/4 final salary for 40 years service.  But that was back in job for life days.  The other wrinkle of most private company schemes was that the company administered them (but most also gave the opportunity to elect "rank and file" staff members to the oversight committee.  Theoretically the company was supposed to model future performance against assets and top up any potential shortfall.  This became a bit of a nightmare for publicly listed companies as whether they had to top up (usually reasonably large sums) or not in any particular year impacted shareholder returns (dividends).  When Mr No More Boom n' Bust saw those big pots of money sitting in companies and decided to levy tax on them it was the final straw and companies started shutting them down (although the process had already started, but that was the final nail).  Having that big pot of money sat there, in very rare cases, proved too much of a temptation for companies that weren't performing so well, which lead to shameful events like the Mirror Group scandal.


    The demise of the final salary schemes then lead to the rise of the money purchase schemes.  This really is a private pot.  Whatever you put in, plus in most company schemes whatever contribution your employer makes, is yours and yours alone.  Unlike final salary, it's not a shared pot, and is definitely not funding previous retirees who are part of the scheme.  It's invested by the pension provider (in my case Scottish Widows - she never seems to get any older does she?) in a portfolio of investment products with the hope there will be an incremental return each year.  But like any investment they can go up and down with the markets.  Schemes usually allow you to define your risk profile providing greater potential gains in higher risk investments along of course with potential higher losses.  At the safer end they tend to be more invested in gilts and government bonds.  Don't forget high interest national debts directly contribute to the majority of peoples private pensions!  Most schemes also are managed so that as a person gets older and nearer retirement the investments are progressively moved into safer investments meaning you won't lose your pension pot a year before you retire if we hit another big recession.


    Here endeth the lesson.  This is useful stuff to know and understand whatever age you are - as I said I think it should be taught in school.


    Cheers, Reg.

  • Derek_RDerek_R Posts: 1,698Member

    The cost of children is utterly phenomenal and - as a parent - one worries interminably about the future. Also - I have no money for guitars and not much time to do live music !


    I have no kids of my own but I inherited a couple about twelve years back. That was about the last time I had any money (hence my motorbike is 14 years old...). It's interesting to watch Karen's kids and their friends develop their own views on this pension / mortgage type existence that they witness with me and their mother and their friends' parents. I get the impression that a large proportion of them have decided it's not for them.


  • Reg SoxReg Sox Posts: 3,121Member

    As much as I hate the nanny state there are some instances where they really do have to protect people from themselves!  There's an entire generation that has lived the basis of I want it all and I want it now and I'll get it on credit (although how they think that's a different concept to a mortgage is beyond me).  When I was young you went into the bank in a suit and tie and had a grilling from the manager before they would deign to lend you any money.  I don't recall any personal bankruptcies back then.  Now, 38 years later, same bank, same branch, they would just throw money at me if I gave them a chance.


    Know the really interesting thing?  Having had my Amex card cloned in the US a number of times in the past (about time they caught up with chip and pin) I keep track of my credit rating.  Because I have no loans, and my mortgage was paid off a few years back, my credit rating is slowly falling!  It seems that without resorting to credit it'll be harder to get credit in the future.


    Cheers, Reg.

  • Derek_RDerek_R Posts: 1,698Member

    Aside from buying a Stonebridge, this is the type of thing I could do if I wasn't so sensible:


    Four Days In New York with Martin Taylor


    How does a few days of guitar playing in New York sound?

    What about learning guitar in the magnificent Catskills Mountains during the day and rewarding yourself at night with some handcrafted beer as you sit around a fire jamming with myself and other guitarists from around the world?
    I'm really excited to announce today my first-ever Martin Taylor Guitar Retreat on the East Coast of the USA. It will be held in the stunning Catskills Mountains just 30 minutes from Woodstock and only 2 hours from New York City. 
    My last USA retreat sold out in less than 45 seconds! (yes, that’s seconds)
    But it gets even better…
    I've invited acclaimed fingerstyle, blues & acoustic guitarist Woody Mann to join me as a guest instructor. In addition to this, we’ll have Jim Cunningham teaching a workshop on 'how to set-up and maintain your guitar', vocal-coach Alison Burns with a class on ‘Vocal Tips for Singer-Guitarists’, and my manager James Taylor will teach you ‘how to build a successful career as a guitarist’
    Instead of that I'll sit here with my copy of Transcribe and a Martin Taylor CD...
  • SmartySmarty Posts: 403Member
    Wow - that's  some retreat! Any idea how much that was Del?
  • Derek_RDerek_R Posts: 1,698Member

    Here you go Smarty:




    $2000 give or take... But the parking is free.

  • SmartySmarty Posts: 403Member
    Free parking? I'm  in! I expected  it to be more than that if I'm  honest.......
  • Kevin PeatKevin Peat Posts: 3,146Member

    Reg - It used to be that your kids were your pension. 


    Now your kids are someone else's pension ! (If they contribute to debt interest)


    I accept that final salary (company) pensions, whereby a younger generation of workers contribute to retirees' pensions, is unsustainable - which is why I'm pretty sure the state pension (which runs on exactly the same lines) is unsustainable too. 


    No. The Government won't allow it to fail, but It will have to end up means tested and rationed to those who 'need' it - to the exclusion of those who are 'rich' enough to have made their own provisions. 


    This is redistributive socialism in disguise - as is the punishment of consumption (a measure of personal success) by limiting size of wheelie bin in the name of the environment. 


    I'm not overly anxious about my pension (I've written it off) - but I am overly anxious about my kid's life opportunities. They're both applying to Russell Group universities to read sciences so this might give them a good start. But they're up against a nanny state which sees its duty as being to close inequality gaps and to keep importing disadvantaged people to justify its own existence - it also subsidises the continuation of the helpless gene in our own people by means of a redistributive tax and welfare policy. 


    How can a 'nanny' state exist with no-one to nanny ? It needs a victim class to thrive. A harmonious and wealthy society is inimical to its survival as it solves the endless problems it needs to keep itself important. 

  • Reg SoxReg Sox Posts: 3,121Member

    Derek, that does sound like fun.


    Kev, careful you don't limit your kids life prospects to the UK though isolation.


    Cheers, Reg.

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