Will debt stifle growth?

Is growing our economy out of trouble realistic given high levels of personal and government debt?.

No-one commented on my last piece, but somewhere out there 30 people pressed a button to signify that they found it helpful. I think that’s my best score, but I do of course realise that ten may have pressed the wrong button and that the one person who really found it helpful decided to press the button twenty times to make me feel better, or for the sheer joy of messing up the numbers. Raw scores, as we used to call them in research, are unreliable chaps.

This point is not lost on the economists at the Bank for International Settlements, who are properly tentative about their conclusions, even though they are based on some quite robust evidence. Here is the abstract of a recent paper:

"At moderate levels, debt improves welfare and can enhance growth. But high levels can be damaging. When does the level of debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is bad for growth. For government debt, the threshold is in the range of 80 to 100% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Up to a point, corporate and household debt can be good for growth. But when corporate debt goes beyond 90% of GDP, our results suggest that it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated."

Phew! Our 2010 figure for public debt is 89. So that’s OK. ‘Fraid not. Our numbers for corporate and household are 126 and 106 respectively. At some point, we really are going to have to cut public spending, rather than attempt to slow down the increase, which is what we are doing now. Growth is not going to pull us out of this mess.

Or the BIS economists are off their trolleys. Take your pick.

Now you see it...

Between the fiscal years ending April 08 and April 10 personal pension contributions fell by £2,200,000,000, and a million people stopped contributing altogether. But the Office of National Statistics points out that the figures don’t include self invested personal pensions – SIPPs. Back of fag packet calculations suggest that SIPP business might well have made up the difference. As I said: raw scores are trouble.

I’ll huff and I’ll puff...

There is much time and energy being spent writing on blogs by financial advisers convinced that their clients would much rather have them earn commission than fees. The regulator plans to introduce this simple idea: if you call yourself an adviser you must tell people what your advice will cost them.

So here is the killer question for the next ‘adviser’: “how will you demonstrate that the value added to me by your advice will at least equal the cost?”

Higher rate tax

There is a broad academic consensus. The 50p tax bracket will raise no money and might even reduce the overall tax take.

There is broad chattering classes consensus. Getting rid of said tax band is too unpopular even to contemplate. The Tories daren’t go for it because they don’t want to be tarred with a class brush. The Lib Dems would go along with the abolition as long as they got, in return, mad Vince’s Mansion Tax. The Labour lot are presumably in favour of increasing taxes all round and thus strangling whatever vestigial growth prospects might survive the debt overhang (see above).

In truth, none of them are worth a vote. They are either stupid, or craven, or both. Depressing, isn’t it?

Read this article at http://www.candidmoney.com/articles/article244.aspx