Mortgaged Britain

After the election and the attempts of the new Coalition Government to tackle the UKplc debt mountain, we have finally reached the point where we now know who will be leading the opposition party. It remains to be seen how Ed Milliband positions the Labour party for debate and shinanygons (?) at Westminster.

I would certainly hope that he brings a fresh approach and helpful challenges to keep the Government thinking creatively about solutions to our problems. We all know that the last Government overcommitted itself - which massive increases in Public spending, however I'm not seeking to apportion blame here. Given the credit crisis, the actions that Mssrs Brown and Darling took certainly cost us all a lot of money in bailing out the Banks and yes it would be accurate to say that the Government are utlimately responsible for regulation, so there is a degree to which I can go with the notion that they have themselves to blame. Nevertheless, depending on your point of view they were rather forced to bail out the banks.

Of course the other public finances are certainly the responsibility of central Government and it would appear that these have swollen out of control and that there will be ample opportunity to "bring these back into line". That said, cuts need to be made carefully and responsibly otherwise we may find ourselves in dire straights.

I certainly believe that we must get public finances under control and ensure that our public servants are serving the public good and not merely a glittering career in "nice things to do". But there is a danger of throwing the proverbial baby out with the bathwater.

I'm not sure why we must adhere to a strict 4 year timetable. Imagine the debt as a mortgage (which is close to the truth), you can do several things with a mortgage - reduce the repayments so that only the interest is paid, leaving a big sum to find at the end (not a good plan for anything other than the short-term). Alternatively set the repayment schedule over 25 years and clear the loan - it ends up costing around twice as much as the debt borrowed, but is a more manageable monthly repayment. There's also the problem of variable interest rates - so the total cost of the debt could increase rapidly, but provided payments are not missed, the debt will be cleared.

As financial planners, we try to encourage clients to reduce the cost of borrowing by high-speed funding their mortgage payments. This is akin to what the Coalition are trying to do. In practice very few can clear a mortgage in 4 years. Often we can get the term down to 10 years - paid from bonuses, income and perhaps getting rid of some rubbishy old savings policies. The point being that the process won't be easy, but it should be possible.

As much as I would like to see the UK back on favourable terms as soon as possible, doing this over 4 years does seem to be more than a triffle optimistic. The depth of the cuts could do more damage than good.. think of the mortgage analogy - ok you may reduce spending on your holidays or car or whatever, but sometimes you do need to spend money on "normal" things to ensure that the journey of life is enjoyable and not just a pursuit of a number.

For the record, so far pretty good. My impression is that the Coalition are putting a lot of work into rising to the challenge. I just hope that every solution isn't simply cut cut cut. Much like the sea snake that lies still, even whilst others take small bites of it.. suddenly it springs into life.