Friday, 25 September 2020

Country Finances

How does a country borrow money?

Yesterday [Thursday 24-Sep-2020] the chancellor unveiled a raft of new measures the Government hopes will protect jobs as the UK continues its "fragile" economic recovery. The furlough scheme has cost almost £40bn since its launch in March. However, the cost was higher because it paid 80% of wages up to £2,500, while up to 8.9 million people were furloughed at its peak in May.

For every hour not worked, the employer and the government will each pay one third of the employee’s usual pay. The government’s contribution will be capped at £697.92 a month, much lower than the cap on the original furlough scheme of £2,500.

Because of the requirement to work at least a third of usual hours, the scheme will cover the wages for a maximum of 66.6% of hours not worked. This means that the government contribution is worth 22% of full pay. As a result taking together pay for full hours worked, and state and company subsidised wages for down time, employees using the scheme will receive at least 77% of their usual pay [unless it is cut down by the government cap of £697.92].

First, we need to understand what is the national debt.

There are three sources of income, Taxes & fees, Borrowing and 'creation of money'. Rather than borrowing from banks, the government typically borrows from the ‘market’ primarily pension funds and insurance companies. These companies lend money to the government by buying the bonds that the government issues for this purpose. Many companies favour investing money in government bonds due to the lack of risk involved.

The debt is currently higher [in nominal terms] than it’s ever been before. While the government talks about reducing the deficit, the reality is that the total national debt will keep growing. Even if it stops the debt growing, taxpayers will continue paying around £120 million a day in interest on the national debt.

The next question is, how long before the creation of money is the only option left?

No comments:

Post a Comment