The case for cuts

Most of my friends are left wingers who don't seem to understand the basics of economics that require us to deal with the deficit. I thought I'd try to explain it in the easiest way that I can.

Imagine you and your wife have been married for 7 years. You both have jobs on £24000 and £30000 respectively. You have lived in your house for years and are just keeping on top of your bills so that have enough for a couple of holidays every year. You have one child who is now at the age where he needs to go to school.

You want to give your son the best of education so you agree with your bank that you can have a yearly loan of £5000 to pay for a full time place in an independent school. You think that a pay rise is on the way for both of you which means that in a couple of years time you'll be able to cover the costs of the education. You can keep up the costs of the interest on the loan of £500 for this year - but you know the interest payments will keep going up without the raise.

Suddenly your wife falls ill and has to work part-time. Her annual salary goes down to £20000. Your bank agrees to fund some healthcare treatment which should make your wife better in the next 3 or 4 years. The bank is getting worried though, it's looking less likely that you will be able pay the money back. But you just about reassure them that your wife will get better and the pay rises are around the corner - you hope.

This is the stage we are at the moment in the UK economy.

You have several choices now:

1) You can ask the bank for a few more pounds and continue living as you are. They may give you some more money, or more likely they will get worried that you are not dealing with the situation properly. Shortly it looks like you will be paying more interest on your school loan than the amount you actually borrowed. They may put the interest rates on your loan up, or if they are really unsure about you they may start to ask for you pay off your loans immediately and send the bailiffs in when you can't.

2) You can cancel your twice yearly holidays and move your son to a day boarding school which only costs £2500 a year. Ok, you have a bit of extra money to handle the interest payments on your loans, but the amount of interest you have to pay is still going up and you just have to hope that your wife gets better soon so that you can get on top of the interest payments. If not the bank will get jittery...

3) You can cut back and send your son to the local comprehensive. The holidays need to go too for the time being. You have to cancel your health insurance and stop visits to restaurants. You still have loans to pay on the healthcare, but you can overpay to pay the loan off quickly. The bank is happy that you are handling the situation and agrees not to send in the bailiffs.

If you can't see why this is like the country, then:

For your combined salary read Government Income.
For your bills read Government expenditure.
For the annual school fees read structural deficit.
For the loans for healthcare read recessionary deficit (part of the automatic stabilizers)
For the holidays read Government schemes.
For the bank read International Credit Agencies and Money Markets.
For Bailiffs read the IMF.

In a nutshell, before the financial markets imploded we were already borrowing money to finance our yearly spending. The impact of recession meant that our income (i.e. tax) reduced while our outgoings (e.g. benefits) went up. Leaving us with a yearly deficit of around £155Bn.

Even when the recession has been dealt with we still have our additional spending in the structural deficit to contend with, but by that point our total loan will be £1400Bn up from £700Bn now - our interest payments will be nearly the same as our yearly benefits payments.

The unions don't want us to do anything, option 1, in which case the international money markets would surely stop lending money to us and call in the IMF.

Ed Balls and his ilk want option 2, in which case the international money markets will get jittery and we just hope the recovery is strong enough to pull us out of our tailspin.

The Government has chosen option 3, they want to stop some of the extra spending and get rid of the structural deficit within 5 years. It will still mean that the total deficit will go up to £1300Bn but you have to make a start.

I know which I favour.

Squiffy.