4

     THE PUBLIC SECTOR

    

    

'PULLING THE WOOL . . .'      To really understand the old saying ‘to pull the wool over someone's eyes,’ you have to imagine what a sheep feels like when it is being sheared. If a sheep doesn't want to be fleeced, it wriggles about, so, to calm it down, the shepherd pulls ‘the wool’ over its eyes in order to temporarily blind the creature to what is going on.      In the jingle jangle jungle of money jargon there is a great deal of mind-boggling mumbo-jumbo that does a similar job; ‘a part-convertible subordinated index-linked loan stock with warrants attached’ is but an example. Even the experts refer to this sort of gobbledegook as ‘funny money’.      Some experts go further and admit that politicians, economists and other professionals in the financial world use such language in order to stop the ordinary person from understanding how money actually works – simply because if everybody knew, then no one would think they were very clever!      Whether this is true or not, the fact remains that not only do the experts disguise the essence of what they are up to with strange words, they also frequently use only the initial letters of these words – obscuring what they are talking about even more.

COINING A PHRASE      Because so many of us understand so little about the verbally complex and often totally abstract concepts thrown up by the various disciplines of modern economics, politicians have little or no choice other than to use metaphors in order to get some sort of meaning across.      A metaphor is supposed to help us understand and experience one kind of thing in terms of another.      But politicians have not necessarily had any training in the basics of economics either – and so we find ourselves being urged to ‘fight’ inflation, to ‘cure’ unemployment, and to look for the ‘green shoots’ of recovery while someone else attempts to ‘kick-start’ the economy!

WHERE THE GOVERNMENT MONEY GOES . . .      The public sector is what politicians and economists have chosen to call central government, local authorities, what's left of the publicly-owned nationalized industries – such as the Post Office and the London Underground – and other public authorities, such as the Health and Safety Executive. It plays a very important part in the British economy, being responsible for a lot of spending and production.      The government spends, or redistributes, about 40% of the national income – all the money we earn from what we all do – and roughly half of this spending is on transfer payments (pensions, unemployment, and child benefits), so-called because they switch spending power from one group of people to another.      The rest is spent on goods and services such as education, medical care, and defence. Even local authorities like a District Council are huge organizations. A medium-sized city will spend several hundred million pounds a year and employ thousands of staff.

. . . AND WHERE IT COMES FROM      Today, most of the nationalized industries – businesses run on behalf of the taxpayers – British Telecom, Gas, Electricity, Oil, Steel, etc; have been sold off to the private sector or privatized, and no longer provide income, or losses, for the government.      How to ‘raise’, or get, money, and how to spend it – income against expenditure – is called ‘Fiscal’ or ‘Treasury’ policy. Like any other business, a government has to pay its bills and when it does not have enough income – which mainly comes from taxes and National Insurance contributions – it has to either cut spending or borrow money in order to balance its books. Raising taxes and cutting public spending on things like National Health and Education has always been unpopular!      GOVERNMENT BORROWING      Government borrowing is called the ‘Public Sector Borrowing Requirement’ – or ‘PSBR.’      When a government has to borrow money it is always accused of being inefficient so it is much better to announce that you intend to ‘increase the PSBR’ rather than to admit, more openly, that you need to borrow money!

The government borrows money by issuing various forms of bond. A bond is an IOU, and the terms of the contract between the lender and the borrower are set out on a ‘certificate’. This is roughly how it works:      ‘Lend me some money, let's say £100, and I'll guarantee to pay it back in 5 years (a short bond), or 10 years (a medium bond) or 15 years (a long bond). I'll also pay you interest every 6 months at a rate of – well, what have I got to offer to make it worth your while? (haggle, haggle. . .) OK 10% it is, you drive a hard bargain! Here's a bit of paper that shows everything we've agreed.’

The borrower has sold his bond for money and can now go and spend it.      A large number of bonds issued by a borrower used to be called a stock since most investors buy in multiples of £100 bonds, today they are called stocks.      So a stock is a bond, a bond is an IOU, and an IOU is a certificate. These certificates can be bought and sold like anything else and all things that can be traded on a stock exchange are called ‘securities’ .

A SENSE OF ‘GILT’           ‘Gilts’, a nickname for gilt-edged securities, are government stocks. These stocks are certificates issued by the Bank of England – the central bank of the UK – on behalf of the government treasury. (‘Gilt-edged’, some say, because they were once edged with gold – but others say they never were and the name is supposed to have come from the fact that the government guarantees the interest rate as well as repaying the original capital on a specified date! Ho hum. . . .)      So Gilts provide the government with the long-term finance – or borrowed money at interest – which they in turn spend on ‘our’ behalf along with the money raised from all the various forms of taxation.      ‘ALL THAT GLITTERS’      Meanwhile, speculators are buying and selling these IOUs like crazy! If the economy is weak, the demand for borrowing in the private sector will increase, often forcing the government to put up base interest rates – the lowest price of borrowing money – in order to ‘strengthen’ the pound and attract foreign investors. More about that later!      When interest rates go up, the value of the fixed-interest Gilts goes down and vice versa. So the turnover – or sales – in these government stocks switching from one holder to another can be tremendous as investors frantically try and guess which way the economy is going to turn – up or down.      In 1986, the total turnover of gilt-edged stocks was £424 billion whereas the total value of all stocks listed – short, medium, and long – was only £134 billion. The enormous difference between the turnover and the value reflects the amount of buying and selling and the returns made.      In the same year, new issues totalled £14 billion and all the government got was £7 billion. (New issues are often just to replace stocks that have been redeemed – or paid back!)      While the government still has some control over the money supply – setting interest rates via the Bank of England and other monetary policies – it is becoming increasingly clear that no government can actually control a modern capitalist economy.      CONTROLLING THE ‘MONSTER’      Anatomy shows us how the human body is made up of organs, intestines, skeletal structure, muscles and blood vessels and how they all interact.      An economy, when it is similarly opened up and pulled apart, shows us the way a government, banks, money markets, industries, and individual people pay for themselves and each other, how the money flows between them, and how they create new things and replace what gets used up.      What many radical – and often well-intentioned – economic policy-makers seem to do is to follow in the footsteps of Baron von Frankenstein. Obsessed with their own theories and vision, they attempt to reassemble the perfect economy and give it life.

When the inevitable monster rises from the slab and the villagers are up in arms, all they can do is look around for an Igor to blame!

If the public sector cannot control the economy then how can it control the private sector? Huge profits are there to be taken, simply by moving money around from one investment to another – and making money out of money. Is the ultimate power once again shifting away from those who merely control the money supply to those who create it?      Who is in charge? Our elected leaders, or those who run multinational corporations or similar monopolies? Is democracy about millions of voters – or thousands of speculators and shareholders looking for increased profits?      Meanwhile – having to keep face with the electorate – having to be as good as the private sector but not being paid as much – to the poor politician and humble civil servant, it must look as if controlling the money supply has lost some of its charm!