Contingency Reserve

Much has happened since my last post, but this one is concerned mostly with British Politics and the Economics thereof.  According to World , we have a GDP of $2.31 Trillion (approx £1.6 Trillion) for the year 2008.  We have Government Spending again for the same year, 2008, 0f £575 Billion (Source, UK Public Spending).  This figure is expected to rise rapidly as can be seen here

UK Government Debt
UK Government Debt

Now much of that is central Government spending, in fact, from the same source, UK Public Spending, 76% of this total is Central Government spending, as defined by the Budget.

Now, first, let me say I’m not an accountant, but I have been involved in drawing up Budgets in companies and I know of two points that I believe need expanding, the first is the idea of a “Reserve”, a portion of the budget that is not allocated when the figures are drawn up, the other point is around the use of the Budget granted, “Spend it of we will not get the same next year”.

Reserve first.  Of the £575Billion in the 2008 Budget, what was the contingency set aside to cover emergencies?  I can remember in the past that the Thatcher Government raided the Contingency Reserve on more than one occasion and that our original incursion into Iraq was, supposedly, paid for out of the Reserve.  So how big is it?  Figures seem to be very hard to come by, but the overall Reserve seems to be close to 10%, so on 2008 figures, if it is 10% the country has a reserve of around £57Billion, which in my book is a huge amount of money.

Now the thorny subject of “I have to spend my Budget”.  In all the business’ I’ve worked in that draw up Budgets for the various departments, one thing more than anything else has attracted my attention.

  • Firstly, the current year’s Budget is ALWAYS based on the previous year’s budget, with an additional sum that usually is added to cover inflation
  • Secondly, ALL managers I’ve dealt with ensure that they spend their allocated budget, even if a portion, sometimes a substantial portion is effectively wasted by buying equipment or services that are not needed.  The old saying “What I want is not what I need” often applies, things are bought and paid for out of the Budget, they can usually be justified, but they are not necessarily needed to run the business, just they are wanted to make sure the budget is fully allocated and used.

So, the question is, are your Government Ministries any different? Have we had any Ministries come in under budget in the last ten years? I’m sure an FOI request would find out, but I think I can probably guess the answer without going to the expense.  Let’s, as a country, ask the Ministries to half their contingency reserves and hit their budgeted spending by spending money on what they need, not what they want.

As a further point, if anyone has details of how the budgets at the various Ministries are drawn up, I’d be very interested


Leadership? Pull the Other One

Today’s U Turn, agree to let the Gurkhas come and stay in a country that they risked their lives for. Amazingly it was originally refused on the grounds of COST to the economy. No thought of these people having risked and sometimes laid down their lives to keep us safe. Ignore any that say they are mercenaries, they have shown a devotion to this country that should shame many of the people that call themselves British.

Yesterday’s verbal U Turn. One comment saying that Hazel Blears had accepted that what she did was wrong. Another comment later in the day saying that the PM had “Full Confidence” in Hazel Blears. What passes for full confidence from “Our Illustrious Leader” must seem like a death sentence.

Which really brings me to the point of this post.

Where is the leadership within the country today? As I see it Cameron has played it reasonably well, with various MP’s being told “Go or face de-selection”. Where is the Executives response? Who has resigned from Labour? Who has resigned from the Government? And WHY would an election cause chaos?

Tracker Mortgages in the UK. Problems ahead??

Now, although I don’t like being a harbinger of doom, I currently do not see an easy way out of the situation I am about to describe below.

Business Cycles turn, at the moment we are at the bottom for interest rates as demand for goods in the “Real Economy” is so low, as the cycle turns, interest rates will have to rise, for savers, that will be welcome news, but for borrowers? Think this through, in the last 10 years in the UK, “Tracker Mortgages” have become the norm.  Currently, most people on Trackers are in a position where the repayment interest rate has dropped to between 1.0% and 1.5%, meaning that even if finances are stretched unless both partners lose their jobs then the repayments should be OK.

But, when the cycle turns, the Trackers will do just that, follow the interest rate up, meaning swinging increases in repayments, possibly in a short period.  Unless people are still paying their mortgage at their original rate and driving down the amount of capital owed, rather than reducing the payment to survive, the forthcoming interest rate rises will result in incresaed mortgage payments that that will match the previous decrease.  If people are finding it hard to repay now, how will they cope with the increases?  Any rate rise may not happen for up to three years, but when it does, if you are on a tracker, you are in trouble unless you can extend your mortgage or match the new payments.

We have one other thing that we need to consider in all of this, the Pound Sterling.  If it can maintain, or rise against, it’s current position against the other world currencies, then this change in the business cycle may be able to be postponed for a a few months, maybe a couple of years, but if the Pound slips again, look out for inflation rising, and as soon as inflation starts rising, the currency falls unless interest rates go up.  As it stands, it seems unlikely that Deflation, at least in the CPI, will take hold, especially with food inflation more like 5-7%

So what is the point of this post?

If you time it right, take all the advantage you can from the low rates that exist at the moment.

If you are unsure of your timing, I would get out of a Tracker within the next 12 months and move to a rate that’s fixed for 5 years if you can

whatever happens, it’s your decision, but as sure as eggs are eggs, interest rates will rise, avoid being hit by them as much as you can

British Inflationary Fears

I have a very bad feeling about this, let me check out my hypothesis and you can shoot me down in flames if you like. Interest Rates are at record lows, but they can only stay there while the inflation climate is benign. Currently Inflation is benign, mainly due to lower fuel and commodity costs, even though the currency has dropped something like 30% in 3 years. (Here comes the real BUT. ). But….. commodities are just starting to pick up again, only a little so far, but they are starting to move and we import a huge proportion of our commodities used in manufacture. Once commodities rise to an extent where the currency depreciation is nullified then we have inflation back with a vengeance. The only way to tackle inflation is to raise interest rates to draw in the money that has been issued by the Quantative Easing that the government has undertaken. Increasing interest rates will increase costs on all those on Tracker Mortgages, and that’s the majority as Trackers were sold as “The (latest) best thing since sliced bread”, so we end up with another round of defaults and reposessions, this time with conditions tightening. If the government ignores the problem and doesn’t raise rates we have a Zimbabwe situation with potential hyper inflation, if the government does something, we have people sleeping in tents. I remember interest rates at 15% and bank loans, not credit cards, at 26%, what that would do to a typical mortgage in terms of interest just doesn’t bear thinking about.