Sunday, 12 October 2008

Oh how things change

One of the most telling points Margaret Thatcher ever made was her observation that running the national economy should be like running a household budget. If you spend more than you earn you will have to pay for it later with interest. If you save when times are good it gives you a cushion against a later adverse change of circumstances. At the time it was pooh-poohed by the liberal intelligentsia as too simplistic. I wonder whether they hold to that view today.

A household budget, like any budget, has two sides, income and expenditure. Real income comes only from payment for work and returns on investments. Borrowing is not real income. Expenditure has only three elements: (i) essentials, (ii) discretionary spending (luxuries) and (iii) savings. When times are good many luxuries become a normal part of life and are treated as essentials because there is no need to treat them in any other way. If you lose your job, find that overtime is not available for a while or suffer illness that impacts on your ability to work to full capacity it does not take long for luxuries to be seen for that they really are.

Saving used to be a normal part of household budgets. When I was growing up, in a household of modest means, something was always being put by. There were three reasons for this. Buying something on credit was simply not part of the equation, so it was necessary to save in order to be able to replace worn out items or add to the things we had. There would not always be enough in the weekly wage packet to pay for ordinary expenditure and buy, say, a new bed or fridge or kettle, so money was put by. It was not known when such items would need to be replaced but they would at some time and it was necessary to make provision. At certain times of the year lump sums had to be found to meet bills which were part of normal annual expenditure but arrived as single significant bills not weekly or monthly items; rates (a predecessor of Council Tax), school uniforms and insurance for the car or house all fell into that category. The third reason was that the future is uncertain. Costs would arise from time to time which were not predicted but which would, nonetheless, need to be met. A little was squirrelled away every month to build up a fund to cover that eventuality.

Seen through modern eyes, running a household budget like that seems very quaint. Yet it must be borne in mind that credit cards were unheard of and bank loans were avoided because they incur interest and just make whatever you buy more expensive. What lay behind it was a very simple approach, it was the recognition that income was limited and should be used to maximum benefit.

Now that the credit bubble in the national economy is spewing air at a massive rate, I wonder whether there is any chance of my late parents' approach to household budgeting being adopted more widely, including by government.

It is hard to see that individuals will not adopt it, a great many will be forced to because credit will not be available to them to the same extent as before. Replacing the television because a new model is available will no longer be affordable, instead the old one will have to live out its useful life. Changing the car because a neighbour you don't like has a better one could only be done because there was cheap HP available, take away the credit or make it much more expensive and people will see that modern cars can run 150,000 miles before they give up the ghost. The list goes on and on. We have developed a spendthrift culture based on cheap credit and a shallow desire for the latest gadgets. Withdraw the credit and the shallowness of the desire will be exposed. It might take time but it will happen because it will have to.

Many of us still have aged relatives who sit on the same sofa they have had in their front room since we were children. They have never replaced it because it has always been comfortable and the odd moth-hole in an arm can be covered by a crocheted article. More significantly, it has never been replaced because it was paid for with hard earned cash and Auntie remembers not just how long it took to save for it but that her parents could never afford such luxurious furniture. Maybe she could have bought a replacement on a credit card twenty years ago but that would have been a wholly unnecessary extravagance.

It's all a matter of attitude. For those of Auntie's generation money has always been a precious commodity. It can only be earned once and buying something on credit is tantamount to spending it twice. She thinks of what else could be done with the extra cash committed to interest on HP or a credit card. Because she only has a limited amount to spend on non-essentials it is sheer lunacy to pay some of that "treat" money to a credit company. As money becomes tighter for everyone we can expect to see the old attitude returning and people realising how much more they can get for their money when they are not paying interest on credit cards and car loans.

And what of the attitude of central and local government? If Mrs Thatcher was right, government should differentiate between essentials, luxuries and saving. Because national debt is now at extraordinary levels, saving does not really come into it because repayment of debt takes its place. So what about essentials and luxuries? Where do all the diversity officers, climate change advisers, political consultants, social awareness executives and the like fit in? What of the armies of quangoes? Are they essentials or luxuries? For ordinary people the answer is obvious, hence the positive reaction to George Osborne's plan to cull consultants from the payroll. Our current government seems to think in a different way.

We can only hope that they will take a look at their spending commitments and cut out the luxuries such as the ministerial ego-trips, the social engineering projects, the hugely expensive data-gathering exercises and all the other paraphernalia consequent on both their desire to control and their belief that government always knows best. As the part the Labour government played in stoking the fires of the credit bubble become more widely recognised, I look forward to a change in attitude to government spending to match the change which will be necessary for many individuals in their own domestic budgeting.

I am not holding my breath.

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