Another such reason is the government must meet obligations that it has undertake, and should not create debt levels so ridiculously high that they affect future generations to come. This could be catastrophic, as there may be cuts to be had in other discretionary areas of spending, which would otherwise have been supported as a result of the debt that must be paid off.
Other discretionary spending has increased exponentially, mainly due to the economic events over the past 1 months to 1 year. The reject injections into the car industry can be put into question, as many of the industrial experts claim that the investment will not help to revive it. This is because the industry itself is not the cause of the problem, it is the the available credit consumers. Until confidence grows and the banks are willing to lend more money to those who need it, it appears that the financial situation will never truly recover.
Having said this, countries such as Japan have public sector borrowing at around 195% of their GDP. In comparison, the debt of the UK seems relatively low and could be seen as more stable. However, the Japanese have very high levels of personal savings – so they are for more able to cope when the recession is in full swing. The levels of savings in the UK are increasing due to the recession, consumers are less willing to spend unnecessarily – and some are deferring from making large purchases (such as a new home, car or holiday) due to job insecurity. The rate at which job losses are occuring (such as redundancies) causes more and more consumers to question how safe they really are. Such insecurity is a huge blow to consumer confidence, and repents a significant problem for the UK economy. The reason that this represents a significant problem is because aggregate spending and the multiplier effect is what allows the economy to grow. If the multiplier effect becomes almost 1 (i.e. no multiplier at all), this will cause a huge dip on the National Income registers (overall GDP).
The UK has also had far higher debts in the past. After the war it was at 150%, so reaching the 50% mark may not be that significant as the past has demonstrated to use that this can be lowered at time passes. Unfortunately, the best way for this to happen is through raising taxes and others sources of government revenue. Raising taxes will cause consumers to have less disposable income in their pockets, consequentially spending less. Applying the multiplier effect; this will result in less money being registered on national income, causing a raise in the public sector borrowing as a percentage of GDP. Therefore, raising taxes will most likely have adverse effects on the economy – which in the current climate, represents a significant problem. Additionally, consumers are aware that with the use of current tax cuts (such as VAT from 17.5% to 15%) will mean they will only be raised higher in the future – to compensate for the cuts. As a result, they are likely to cut back on spending, saving any money to paid off the raises in tax that are inevitability coming.
Like most businesses, they aim to make profit – as a much as possible. Therefore, the media will take advantage of stories about the failing economy and surge in public sector borrowing. While this may lower confidence on the whole, many do see through this exaggeration and do not take articles written by the media with too much seriousness. A typical example of this was the position of the financial institution “Northern Rock”. The media continuously attacked the financial stability, decreasing the level of confidence. Resulting in vast queues of those who are looking to withdraw their life savings, and a stumbling share price, the bank would have collapsed without government intervention.
The debt as a proportion of GDP has increased from 30% in 2002 to 37% in 2007. This may have been due to the extended period of economic growth – a 'boom'. Increases in government spending were also increased which would have played a contributing factor: increased spending on health, education and social security.
In itself, this does not signal any major issues for the economy, other than a fear of a 'bust' following a 'boom' (which is now undeniable in the current economic climate). However, the extent of the problem has now started to come to light. There is an almost direct association between employment levels and taxation revenue. The BBC has recently announced that unemployment is soaring closer to the 2 million mark – 1.97 million are now unemployed at the last count (ILO measure). The claiming count measure is only at 1.23 million, however it has been agreed that even the latest figures do not account for the entire range of job losses. An increase in unemployment, first and foremost, causes a reduction on tax revenue. If a banker earning £100,000 a year, would pay £35,029.40# in deductions, including tax-free allowances and NICs. Losing their job would mean not only that this revenue is completely lost, but they will have to pay benefits while they seek alternative employment. If this was scaled up to account for the millions unemployed (while they do not all earn £100,000 and are bankers), this will show the millions upon millions of pounds lost in addition to the mandatory spending (non-discretionary) that will only escalate the total debt.
