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|
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?