Wednesday, 19 January 2011

Having it Both Ways

There was a lot being made yesterday of the latest inflation figures. 3.7%!!! Mervin King is really having to earn his bacon these days, yet another letter to the Chancellor.

So the Governor of the Bank of England (that’s Mervin from above) writes to George Osborne, top man at the Treasury, to explain why the cost of living has gone up by more than their agreed target of 2%. But will he mention in his letter to George, the monster that is lurking in the shadows which is the deflation being caused to the pound in our pockets by our national debt? (And I’m not talking here about the value of the pound against other currencies on the money markets.)

Inflation as we all know, is the percentage increase, year on year, in the cost of living. Simply put, if you go to Tesco this weekend (other reputable supermarkets are available) and buy your usual weekly shop, and that half filled shopping trolley cost you £100. Then this months inflation figure would suggest that when you go to Tesco one year from now, that exact same weekly shop will cost you £103.70, the year after that it will be £107.54, the year after £111.52 and so on, because don’t forget this figure is compounded. That element of inflation, I know is obvious to us all, but the bit which is not so obvious is the effect the cost of the national debt is now having.

Let’s not consider the cost of our own shopping for the next bit, but instead let’s consider the shopping trolley of a public sector worker. I’m going to choose for our example, Emma! A lovely hard working, married mother of three teenage boys, who is a ward sister, working in the special care baby unit of a large regional NHS hospital somewhere in the south of England, (lets say Basingstoke because I’ve heard good things about them in the past), someone that all of us can’t help but to love. And let’s assume for this example that such a responsible position as Emma’s, would attract the kind of salary that George at the Treasury considers to be average, £26,000 per annum. That is £100 a day, five days a week, fifty two weeks of the year. (And don’t all you SCBU ward sisters go ringing in to tell me you are on nothing like that much, and that you can’t feed three teenage boys for a £100 a week - I’m just trying to make the maths easy for us all to follow.)

Actually, while we’re on the subject of making the maths easy, and having just blown the lid off the average wage calculation, have you any idea how much effort Tony Blair’s government spent working out at what level to set the minimum wage at its inception? 

£10,000 divided by 52 weeks, divided by 37 hour/week = £ 5.20

You really do have to know your onions, to make it as a Permanent Secretary of State at the Treasury. Those six figure salaries, CBE’s, enormous pensions and eventual promotion to the house of Lords, don’t come easy.

Any way, back to Emma’s salary! For the first time ever, a new factor has crept into the calculations surrounding the loss of value of the pound in our pockets. For the first time in our history the national debt is equal to, or greater than the governments annual spend. That means that for every pound the government spends this year there is a pound out there that we as a nation are paying interest on.

Interest on the national debt is currently running at about 3%. So if George Osborn borrows £100 today to pay Emma her wages, a year from now he will have to pay back £103 (the hundred he’s borrowed and the interest on it) before he can borrow another hundred to pay Emma again (and it will only be a hundred, since Georges’ mate Dave announced his pay freeze for public sector workers). Put another way Emma’s £100 next year will only be worth £97, but the shopping at Tesco will still have gone up to £103.70, in short, this time next year Emma will be worse off to the tune of £6.70 per hundred, not the £3.70 that Merv is writing home about today.

But the reality is far worse because George is not borrowing the £100 to pay Emma for just the one year, he has had to borrow it for ten years, and next year he will have to borrow another hundred to do it all again. Which means that the year after next he will have to pay £6 interest to have Emma in work for one day and Emma’s shopping will be £107.54, Emma’s daily wage is only going to be worth £86.46, poor Emma.
Why then if we have this monster in our sights, as we clearly do, isn’t anybody taking the shot?

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