Brits cut the budget 25%

[Thump553]

* * * VAT does not apply to certain goods and services, e.g., food, childrens clothes, etc. Business is exempt from VAT on goods and services.

I thought one of the core principles of VAT was that it was added in at every stage of production, based on the estimated increase in value at that stage. Wouldn't this exemption gut the theory this type of tax is based on, turning it into a pure regressive sales tax?

 

[highland145]

The problem is that you're shrinking the available pool of money that is needed to lift the economy out of the recession. In other words, I'd expect the recession to last longer.

Didn't the Japanese or some other country try this? I can't remember.

Economics isn't my strong suit. At face value, I could agree. If nothing is done, a year from now we could be looking at 2010 as the good ole days.

Have read somewhere that FDRs massive social spending extended the bad times during the depression. Don't know what the tax structure was then.

 

[Narmer]

The problem is that you're shrinking the available pool of money that is needed to lift the economy out of the recession. In other words, I'd expect the recession to last longer.

Didn't the Japanese or some other country try this? I can't remember.

The Japanese did it but they did it the wrong way, as I mentioned earlier (indirectly). The point is moot because when the economy is expanding and governments seek to do the same thing then people will complain that this will lead to recession. IMHO, this is as good a time as any.

 

[Mark R]

I thought one of the core principles of VAT was that it was added in at every stage of production, based on the estimated increase in value at that stage. Wouldn't this exemption gut the theory this type of tax is based on, turning it into a pure regressive sales tax?

The exemption for business goods and services is how the VAT ensures it only taxes 'added value'. See the example below:

All VAT registered businesses may reclaim VAT on everything they buy. But they must charge VAT on everything they sell (except exempt items like non-luxury food, children's clothes, etc.)

For example:
Bob's Bits buys £1000 of raw materials from Mike's materials.
Bob pays £1200 (£1000 + VAT). Mike receives £1200 (puts £200 aside to be paid as tax)
Bob makes widgets. Which he sells for a total of £1500 + VAT (£1800). Bob receive £1800. Puts £300 aside for tax.

At the end of the year, Bob's tax account reads - VAT received £300. VAT paid £200. Balance = £100 to be paid as tax.

Mike's tax account reads - VAT received £200. VAT paid...

Each business only pays to the government tax on the 'value added' by the business. E.g. Bob's Bits only paid £100 in tax (because they only added £500 of value).

The other exemptions (mainly essentials) are there to counteract the inherently regressive nature of VAT. So, that those on small incomes who spend only on essentials avoid most VAT charges. Whereas someone on a higher income who spends discretionally tends to pay VAT on most of their spending.

 

[dullard]

Didn't the Japanese or some other country try this? I can't remember.

America tried it in a very similar situation. The result is called the Recession_of_1937-1938.

A brief history in case you don't remember the details:
* 1929-early 1930s: The great depression starts
* 1933-1936: The New Deal (massive government spending) starts
* 1934: With the New Deal spending, GNP grew 7.7%; unemployment dropped by 3.2%.
* 1935: With the New Deal spending, GNP grew 8.1%; unemployment dropped by 1.6%.
* 1936: With the New Deal spending, GNP grew record 14.1%; unemployment dropped by 3.2%.

*1937: With the New Deal spending, GNP grew a typical 5%. unemployment dropped another 2.6%.

*Late 1937: The Conservative Coalition formed as a backlash to the New Deal spending. The jumpstart was the Dec 1937 Conservative Manifesto.

The result? In 1938 Republicans had massive gains in congress, New Deal spending was slashed, programs were cut, unemployment rises 4.7% in 1938 starting a two-humped camel graph, GNP dropped 4.5% in 1938, and we really didn't recover until the early 1940s.

All countries, including the US need to do something like what the Brits are doing. However, the timing of the Brits seems very similar to the very ill-fated timing of the Conservative Manifesto. We need to cut spending, now is just not the time. What we can do now however, is cut long-term short-falls (slash medicare by not doing that 21% doctor payment raise, slash social security by raising the retirement age, etc). Then when we are fully out of this recession can we cut the short-term spending. The double punch of cutting long-term obligations with cutting short-term spending will leave us on a very stable base IF we first ride out this recession fully. Cutting too soon means we didn't learn from the second half of the great depression.

 

[highland145]

America tried it in a very similar situation. The result is called the Recession_of_1937-1938.

A brief history in case you don't remember the details:
* 1929-early 1930s: The great depression starts
* 1933-1936: The New Deal (massive government spending) starts
* 1934: With the New Deal spending, GNP grew 7.7%; unemployment dropped by 3.2%.
* 1935: With the New Deal spending, GNP grew 8.1%; unemployment dropped by 1.6%.
* 1936: With the New Deal spending, GNP grew record 14.1%; unemployment dropped by 3.2%.

*1937: With the New Deal spending, GNP grew a typical 5%. unemployment dropped another 2.6%.

*Late 1937: The Conservative Coalition formed as a backlash to the New Deal spending. The jumpstart was the Dec 1937 Conservative Manifesto.

The result? In 1938 Republicans had massive gains in congress, New Deal spending was slashed, programs were cut, unemployment rises 4.7% in 1938 starting a two-humped camel graph, GNP dropped 4.5% in 1938, and we really didn't recover until the early 1940s.

All countries, including the US need to do something like what the Brits are doing. However, the timing of the Brits seems very similar to the very ill-fated timing of the Conservative Manifesto. We need to cut spending, now is just not the time. What we can do now however, is cut long-term short-falls (slash medicare by not doing that 21% doctor payment raise, slash social security by raising the retirement age, etc). Then when we are fully out of this recession can we cut the short-term spending. The double punch of cutting long-term obligations with cutting short-term spending will leave us on a very stable base IF we first ride out this recession fully. Cutting too soon means we didn't learn from the second half of the great depression.

Off the top of your head, any idea what the tax structure looked like?

 

[heyheybooboo]

Typical that I can't find the link that took me to the article that said the 25%.

But here you go.

Britain has now joined other European countries in entering an era of austerity. The new center-right coalition government has announced a budget that aims to slash public spending by 25 percent over the next four years, increase the sales tax to 20 percent, cut welfare spending, and shrink the role of the state in British economic life.

http://www.npr.org/templates/story/story.php?storyId=128013833

25% /year or 25% divided by 4 years for 6.25% per year? Don't know, could be read either way.

This implies the 25%/year.
http://www.deadline.com/2010/06/uk-film-council-faces-25-budget-cut/

Thoughts?

Edit: I'd take the 6.25% as a start.

I'm not 100% sure about these numbers but I'll try to add some context as a comparison with the US.

Overall public expenditures in the UK is around 45% of GDP, up from 39% in 2000. In the US as a percentage of GDP we are around 25% this year (up from 18% in the year 2000).

In FY2000, Federal receipts were a bit over 20% of GDP (hence, the Clinton surpluses in the Unified budget). For FY2009 and 2010 in the US receipts are (were) less than 15% of GDP.

Now ... what is going to happen over the next several years in the US (as we ween ourselves off the TARP, Recovery Act, etc.) Federal expenditures as a percentage of GDP are going to drop to the 22-23% range of GDP (of which around 15% or so will be net interest on the ever-expanding Federal debt).

This is essentially where we were in the early to mid-1980s as far as expenses are concerned.

In the rosiest of scenarios over the next several years Federal receipts will rise to 18-19% of GDP ...

So, in the US the "burden" of taxes and expenditures is far from what we see in the UK (and in no way am I minimizing the significance of our Federal budget difficulties ---- just pointing out the differences between our 2 countries).

The magic "numbers" for the US in terms of Federal receipts and expenditures seem to be in the range of 19-20% of GDP (even as we work through the 'bubble' of debt we have incurred over the last 10 years).

In Uncle Sam's case our 'austerity' program amounts to any combination of cutting expenses and raising revenues in the range of 15-20% to close the projected gap over the next few years (and of course, tackling Part D, Medicare and SS).

Short-term, the 'lowest hanging fruit' in addressing our annual deficit is the $150-$160 billion we are spending each year in Iraq/Afghanistan (not to mention the additional $40-$50 billion spent annually to service the $1 trillion we have already spent).

That's why this 2011 'drawdown' is such a big deal --- slash the overall annual expense and you reduce the annual deficit 25-30%.

It's a start




--

 

[dullard]

Off the top of your head, any idea what the tax structure looked like?

I'll have to look that up. Tax rates were slashed in the 1920s, I mean really slashed. Tax rates soared during the mid-1930s recovery (and I mean really soared0. Tax rates were slashed in the mid 1940s. But I don't know the exact dates or what happened to things like deductions or credits.

 

[PingSpike]

I'm generally against big government, but cutting spending AND raising taxes during a recession...doesn't sound like a good idea. You're decreasing the available money for the private sector and government.

It's probably like over here, where politics hose the entire idea of smoothing out the bumps in the economy.

During the bad times: Increase spending to stimulate the economy! We'll pay the debt off when times get better.

(Relatively) good times appear: The good times are here again! Increase spending because there will never be another recession again and the next guy can deal with paying off that old debt! I want to buy a yacht!

Rinse and repeat until the county goes bankrupt.

 

[piasabird]

If people in California dont like their taxes, they should move. (Easy to say - Your house isnt underwater and unsellable).

If you let O'Bammah keep passing legislation, the government will have to raise taxes about 40% just to pay the debt. So just do nothing and see what happens. Either that or the economy will collapse, the banks will fail and then no one will lend us one dime.

Either way; Same result.

p.s. What makes you think times will get better?

You should watch the show "Wind at your back", which is a show about how people survived during the depression.

Never a borrower, never a lender be. When push comes to shove we will get by somehow. Either half the country will starve to death to save the rest or we will be forced to cut back.

 

[tk149]

America tried it in a very similar situation. The result is called the Recession_of_1937-1938.

A brief history in case you don't remember the details:
* 1929-early 1930s: The great depression starts
* 1933-1936: The New Deal (massive government spending) starts
* 1934: With the New Deal spending, GNP grew 7.7%; unemployment dropped by 3.2%.
* 1935: With the New Deal spending, GNP grew 8.1%; unemployment dropped by 1.6%.
* 1936: With the New Deal spending, GNP grew record 14.1%; unemployment dropped by 3.2%.

*1937: With the New Deal spending, GNP grew a typical 5%. unemployment dropped another 2.6%.

*Late 1937: The Conservative Coalition formed as a backlash to the New Deal spending. The jumpstart was the Dec 1937 Conservative Manifesto.

The result? In 1938 Republicans had massive gains in congress, New Deal spending was slashed, programs were cut, unemployment rises 4.7% in 1938 starting a two-humped camel graph, GNP dropped 4.5% in 1938, and we really didn't recover until the early 1940s.

All countries, including the US need to do something like what the Brits are doing. However, the timing of the Brits seems very similar to the very ill-fated timing of the Conservative Manifesto. We need to cut spending, now is just not the time. What we can do now however, is cut long-term short-falls (slash medicare by not doing that 21% doctor payment raise, slash social security by raising the retirement age, etc). Then when we are fully out of this recession can we cut the short-term spending. The double punch of cutting long-term obligations with cutting short-term spending will leave us on a very stable base IF we first ride out this recession fully. Cutting too soon means we didn't learn from the second half of the great depression.

Dullard, Thanks for the info!

To anyone: Why does the UK think their situation is different from the U.S. in the late 1930's?

 

[Moonbeam]

Government cuts mean world wide return to recession.

 

[bfdd]

Government cuts mean world wide return to recession.

good.

 

[marincounty]

Maybe we should quit spending billions to defend Europe?

 

[Slew Foot]

America tried it in a very similar situation. The result is called the Recession_of_1937-1938.

A brief history in case you don't remember the details:
* 1929-early 1930s: The great depression starts
* 1933-1936: The New Deal (massive government spending) starts
* 1934: With the New Deal spending, GNP grew 7.7%; unemployment dropped by 3.2%.
* 1935: With the New Deal spending, GNP grew 8.1%; unemployment dropped by 1.6%.
* 1936: With the New Deal spending, GNP grew record 14.1%; unemployment dropped by 3.2%.

*1937: With the New Deal spending, GNP grew a typical 5%. unemployment dropped another 2.6%.

*Late 1937: The Conservative Coalition formed as a backlash to the New Deal spending. The jumpstart was the Dec 1937 Conservative Manifesto.

The result? In 1938 Republicans had massive gains in congress, New Deal spending was slashed, programs were cut, unemployment rises 4.7% in 1938 starting a two-humped camel graph, GNP dropped 4.5% in 1938, and we really didn't recover until the early 1940s.

All countries, including the US need to do something like what the Brits are doing. However, the timing of the Brits seems very similar to the very ill-fated timing of the Conservative Manifesto. We need to cut spending, now is just not the time. What we can do now however, is cut long-term short-falls (slash medicare by not doing that 21% doctor payment raise, slash social security by raising the retirement age, etc). Then when we are fully out of this recession can we cut the short-term spending. The double punch of cutting long-term obligations with cutting short-term spending will leave us on a very stable base IF we first ride out this recession fully. Cutting too soon means we didn't learn from the second half of the great depression.

2010: With New Deal Spending, country is broke, FDR is dead and laughing in his grave. You said it yourself, Medicare and SS need to eb cut.

 

[Moonbeam]

good.

Good for whom, the miserable and worthless because everbody will be?

 

[StageLeft]

Typical that I can't find the link that took me to the article that said the 25%.

But here you go.

Britain has now joined other European countries in entering an era of austerity. The new center-right coalition government has announced a budget that aims to slash public spending by 25 percent over the next four years, increase the sales tax to 20 percent, cut welfare spending, and shrink the role of the state in British economic life.

http://www.npr.org/templates/story/story.php?storyId=128013833

25% /year or 25% divided by 4 years for 6.25% per year? Don't know, could be read either way.

This implies the 25%/year.
http://www.deadline.com/2010/06/uk-film-council-faces-25-budget-cut/

Thoughts?

Edit: I'd take the 6.25% as a start.

*phew* thanks

 

[lothar]

To anyone: Why does the UK think their situation is different from the U.S. in the late 1930's?

Because they don't want to be the next Greece?

 

[StageLeft]

Government cuts mean world wide return to recession.

OR: We're already in a recession and without endless government spending and deficits to try and cover that up the truth is clear.

 

[Rebel44]

To anyone: Why does the UK think their situation is different from the U.S. in the late 1930's?

Because you cant run budget deficit of 10% GDP for long before ending like Greece (and I dont think that anyone can save country like UK or USA when it gets into same situation like what we currently see in Greece).

 

[Moonbeam]

OR: We're already in a recession and without endless government spending and deficits to try and cover that up the truth is clear.

The economy is money being spent. If everybody stops spending the economy will collapse. It is very simple. People who are confident and with incomes spend to improve their lives. People in a state of fear don't spend. Fear is the mind killer. It is also the economy killer.

All you do is worry because you want to get ahead. Today is exactly like the day Jesus realized He was God. It is just such a perfect day. You allow yourself to be driven from pillar to post, to be blown like a leaf in the wind, in a world that is absolutely perfect. One minute you save, the next you invest, while your emotions react mechanically. Surrender totally to the now. In the now, everything that happens happens by the Will of God.

And trust in God but tie your camel first. And the roses smell just as good today, I would imagine, as they did 2000 years ago.

 

[Rebel44]

The economy is money being spent. If everybody stops spending the economy will collapse. It is very simple. People who are confident and with incomes spend to improve their lives. People in a state of fear don't spend. Fear is the mind killer. It is also the economy killer.

All you do is worry because you want to get ahead. Today is exactly like the day Jesus realized He was God. It is just such a perfect day. You allow yourself to be driven from pillar to post, to be blown like a leaf in the wind, in a world that is absolutely perfect. One minute you save, the next you invest, while your emotions react mechanically. Surrender totally to the now. In the now, everything that happens happens by the Will of God.

And trust in God but tie your camel first. And the roses smell just as good today, I would imagine, as they did 2000 years ago.

You are crazy. What the hell do you thing would happen when UK or USA (or other major nation) would be forced to default on its debt? Because with current spending that would happen in less than 10 years. Global economy would go to hell PDQ and I doubt it would be less severe than Great Depression.

 

[Moonbeam]

You are crazy. What the hell do you thing would happen when UK or USA (or other major nation) would be forced to default on its debt? Because with current spending that would happen in less than 10 years. Global economy would go to hell PDQ and I doubt it would be less severe than Great Depression.

First you ask me what do I think would happen like I'm too stupid to see the truth, and then you tell me you doubts about the severity. But everything hinges on just that. It is much better to spend your way out of recession than to allow a depression because a depression is an economic disaster of enormous magnitude. Only a moron choses an theoretical over a know catastrophe.

You are probably still a child and don't know you can get really really fucked.

 

[Jaskalas]

You are crazy. What the hell do you thing would happen when UK or USA (or other major nation) would be forced to default on its debt? Because with current spending that would happen in less than 10 years. Global economy would go to hell PDQ and I doubt it would be less severe than Great Depression.

They're creating an economy driven entirely on government spending. To default on that, would be to default on the entire economy. The great depression would look like child's play in comparison.

 

[dmcowen674]

I wonder how long before our government realizes that this is necessary for the US? Or will that be the next administration's problem?

Bush didn't do it for 8 yrs so why should Obama all of sudden fix Bush's mess?

Maybe in his second term