What did the Romans do for us? A story of banks and tax

Today it is our son’s 11th birthday and at the weekend we ordered a new BMX bike for him.  Spendthrifts?  Well he has worked very hard at school this year and his is the future which we will not sacrifice.

But tomorrow is Budget Day here in the UK and here I suspect Mr Osborne will take a different view.

So I was thinking about taxes.  We all complain about taxes but, as Reg asked in Monty Python’s Life of Brian – What have the Romans done for us?  Romans?  They were the government of the day.

Compare the taxes we pay with another major cost to households – one over which we have even less control than over the government that we can, in principle, remove from office at the ballot box.

Not energy, insurance, repairs or you daughter’s wedding.  No, it is interest paid to the banks on loans they have made to us.

Some people pay no interest because they borrow no money, they were born with a silver spoon in their mouths or they have stolen it.  Bully for them. The rest of us need to borrow money at some time, if only to buy a house.  How much do we as a nation pay?

I focus on the UK because we are here but I suspect that these numbers are similar for many countries, certainly those with high household debt.  You will be aware by now from earlier posts that banks don’t have the money – they print it on demand, legally.   Nice one. You will also be aware of my suggestions which have recently been guest-posted on Positive Money. So I thought I would do some ball-park calculations to see just how much we pay in interest and compare that with tax.

UK government income is about 39% of the Gross Domestic Product (GDP), typical for a European country.  Assume that all this comes from the consumer because even if some is from business, that is effectively paid by the consumer one way or another.  I ignore profits made by exporters just as I ignore profits of foreign companies trading in the UK where taxes are paid elsewhere.

Total household debt includes mortgages, secured and unsecured loans to banks, credit cards and some small change loans.  In the UK the ratio is about 103% of GDP.  Average household debt was £56k including mortgages or £8k excluding mortgages.  Because the lending banks have had to have only 10% of this money to be able to write the loan (for older loans of course this will have been only 3% or so) so their gross profit is at least 90% of the total interest charged.

I assume a mortgage interest of 4% and a loan interest of 12% so the table looks like this, all represented as a percentage of GDP:

Mortgage debt Non-mortgage debt Mortgate interest Non-mortgage interest Total interest Gross profit
88.3% 14.7% 3.5% 1.8% 5.3% 4.77%

Turning that into pounds, this amounts to some £69 billion – almost what we spend on education, half of the health budget, 70% more than the defence budget or 40% more than the debt interest paid – to banks. A rather more authoritative figure can be seen on the CreditAction website which gives £63.2 billion but what’s in a few billion? And of course if and when overall interest rates increase from their historic low levels, the profits will be even more.

What do we get for this?  Well the answer is – er – a moderately efficient payment settlement system. That’s it. I can’t think of much else, can you? Well I suppose some nice buildings, sponsoring the 6-nations rugby, the football premier league and other crumbs from the marketing table.

The quoted profits from the UK banking sector are of course rather lower – when we hear that bigger bank profits are in single figure £ billions the market gets depressed.  The Big Four profits for 2011 were some £24bn – a substantial part of this comes from their international operations anyway but then foreign banks working here will make profits as well.   Oh dear.  What do they all do with the difference?  The payments systems and all that real estate cannot cost £40bn to run.  Surely.

This really puts mis-spending by governments into the shade.  There are inefficiencies in public spending and they are inexcusable.   But at least something is done for all those tax pounds.

So to answer Reg’s question, the 39% or so of GDP is spent on – nothing.  Other than schools, hospitals, police, defence, roads, social security, …

And what do the banks do for us?

5 thoughts on “What did the Romans do for us? A story of banks and tax”

  1. I’m not anti-banking, but at the same time, I agree that the banks aren’t doing much, especially right now. For a while (in the US), they were making really risky loans and hoping it would never come back to bite them in the a**. Now that it has, they have decided not to make any loans, further hurting the economy and even themselves.
    I think banks are necessary, just like taxes, but there has to be moderation and common sense in both.

    1. I agree @Shane. Despite the piece I too recognise that banks are necessary and even that demand-driven money creation is so far the most effective way of generating money.

      But as we have published before, the banks make enormous yields out of this process and therefore we have to (a) reign this in by some means because that sort of profit is corrupting and dangerous particularly of the political process and (b) persuade them to become more useful members of society. But we don’t want to throw the baby out with the bathwater…. 😛

  2. The way I see it, this article is not so much about vilifying the banks as aiming to question our attitudes towards government. Comparing governments and banks in terms of efficiency will show that even allowing for the inevitable waste of state beaurocracy, governments are much more versarile and efficient in providing services than banks.

    1. As long as you don’t mix business with pleasure too much. It can be an awkward situation if for some reason you find yourself either as a borrow who cannot repay a friend or a lender who is depending on a friend to repay a debt. There needs to be a clear demarcation between the two IMHO.

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