I had considered writing a weekly post in the run up to the election. I didn’t do this because I didn’t have enough time to do so and there are hundreds of other people writing who are much smarter and much more clued up about politics than I am. So instead, I did a lot of reading and tried to learn a lot more about how the political system works and what is going on. There is one thing that has been bugging me which hasn’t got a lot of coverage and that – as a qualified accountant – I’d like to think I understand and have some handle on.
As I have woken up early on election morning, I figured it is something I would get off my chest, even if there is minimal chance that it will persuade anyone to vote differently. I think it’s fairly obvious from other things I have written that I lean to the left. I’m not trying to persuade you to vote that way. I just think it’s more important for you to make an informed decision which is quite difficult in among all of the hyperbole that you get whilst the electioneering process is going on.
The thing that has been bugging me is George Porgey and Davey Wavey’s (and some other parties) obsession on getting the deficit down. They have done this by the measure called austerity, which is effectively just cutting spending. However, it is worrying to me that our chancellor appears to not understand the concept of leverage.
Debt is actually good. Companies have what is called a gearing level. This is the ratio of debt to total debt plus equity. It is essentially shows what percentage of a company is funded by debt. Debt for a company is actually cheaper than equity. Banks generally want a lower return on a loan than an investor would want on their equity (for example 5% against 10% – these figures have been plucked out of the air but are probably in the ball park). Therefore, it is cheaper for a company to repay a bank loan than it is to pay dividends on equity. It will also mean not selling off a large portion of your company.
A great example of this in practice is Duncan Bannatyne. Ages ago I read his book “Anyone Can Do It” which explains his business model. The model was just borrow some money, buy an ice cream van, borrow some more money and buy another. And then move on to more profitable businesses. He will be getting himself in more debt, sure, but his business empire (and you can be sure a man like him must call it an empire. I know I would. It would make me feel Star Wars-y) was growing at a phenomenal rate. I’d recommend reading it if you want to see it in action, even if you hate the guy. I can lend you my copy.
There are other examples of good debt. A number of you, may have a mortgage. This is a loan which you are using to get yourself something you couldn’t afford initially. You believe that you will be able to make the repayments and you think that the cost of the interest payments is worth the long term goal of being a home owner, something that D-Cizzle is very keen for you to do. (Too much so in my opinion – we need more social housing rather than right to buy, but that’s another debate).
Another version of this is a student loan. You don’t think you can afford university now, but you can see the benefit of going and believe that you will be able to repay it in the future. You are not even taking as much of a gamble with this as you don’t pay it back until you reach certain earnings.
The principle should be the same with our economy. It is not doing great, so we need to borrow money (increase the deficit) to be able to do more things that will make us more money in the future (through taxes) in order to be more prosperous now.
It is my opinion that this obsession on the deficit is a fallacy and that the way out of our economic problems is not austerity but more spending now on things that will make the Kingdom more prosperous and allow us to raise more taxes to pay off the current borrowing.
As mentioned before, I am not as clued up as I would like to be and am happy to discuss this with anyone. I now await my fellow accountants to rip my argument apart as it’s been at least 5 years since I studied any of this stuff. Please be kind. It’s 6am and my brain doesn’t switch on until at least 10am.
What if I don't want to be an ice cream man? Greece had a whole economy of ice cream men, and look where that got them.
Good point, well made. With so much money available at very cheap rates the government should be investing in capital projects that would stimulate the economy and raise more taxes. Austerity is more about keeping the masses poor and stupid than about paying a deficit.