UK Paying off U.K. National Debt with flat rate 10% tax

[upingo]

I never thought that I would sign up to an accounting forum. But anyway...

I have been doing some rough calculations, to see how much debt the U.K. is in, and what to do about it. I decided to use the publicly available 2017 numbers as this would be fairer than around present Covid times, but would also take into account the post Brexit vote result (admittedly not after the U.K. left). This way the number's are not too crazy, just really bad.

Total taxes collected for Autumn 2017 were £769bn. With the U.K. national debt at the time being some £1.7tn. Working within this, I tried to calculate the amount the U.K. could pay off by segregating away 10% of all tax receipt monies, leaving the country to work within 90%, and not going over budget.

YEAR IN OFFICE	DEBT + INT : 2.7% (£bn)	TAX : RATE	MONIES RAISED (£bn)		NEW DEBT TOTAL (£tn)
1	1,731 (+48)	10	77		1,702
2	1,702 (+46)	10	77		1,671
3	1,671 (+45)	10	77		1,639
4	1,639 (+44)	10	77		1,606
5	1,606 (+43)	10	77		1,572

ASSUMPTIONS:
1. That the economy would not grow i.e. so tax would remain static at £769bn.
2. That the base rate of interest over five years would remain static at 2.7%

I calculated 2.7% interest rate from a Wikipedia article that stated the interest repayments were approximately £48bn, which from the total debt pile of £1,731tn was what I got. Although information on the government said that it was 2.4%, I went with the larger sum.

ref : https://en.wikipedia.org/wiki/United_Kingdom_national_debt
ref : https://www.ons.gov.uk/economy/gove...tdebtanddeficitforeurostatmaast/september2017

With this in mind, 10% of all tax should be £77bn (76.9), so based on the amount being paid off, and interest rates remaining static, with the interest itself steadily decreasing, are these number right ?

TOTAL : 5 YEARS	ORIGINAL : £1,731tn	RATE : 10% (annual)	PAID : £385bn	REAL DEBT PAID : £159	INTEREST : £226 !
	CURRENT : £1,572tn		TOTAL TAX : £3,845tn (5yr)

If so, then the UK would only be paying £159bn from the real debt pile, whilst forking over £226 in interest payments.

The most amazing thing in that five year period would be that the U.K. Treasury would have let £3.8tn run through its fingers !

 

[upingo]

I read elsewhere that paying back national debt was a bad decision if done too quickly, for macro-economic reasons.

If true, why is this ?

 

[Dave In Capital]

I read elsewhere that paying back national debt was a bad decision if done too quickly, for macro-economic reasons.

If true, why is this ?

The conventional wisdom is that Keynes is the father of macro, making Keynesian and macro policy mutually inclusive. So, the idea is that if expediting debt service reduces aggregate demand ie consumerism, then the economy will contract. Without stimulus the contraction will continue unabated, creating a theoretical deflationary spiral. That is, the anticipation of contraction begets more contraction. As far as why repayment of debt would reduce aggregate demand, macro theorists point to the demand created by government spending. Whether it is public service, subsidies like the NHS and social insurance, or the military, inputs into demand create a stimulus ripple effect. Macro theorists call it the multiplier effect.

Also, there is what central banks call target inflation. It's based on the idea that in a given economy there is either inflation or deflation. The inflation if managed properly supposedly maintains a GDP growth trajectory; whereas, deflation is thought to be less conducive to economic growth. The concept of velocity of money tends to finds its way into this conversation too.

 

[upingo]

Thank you for the explanation.

I subsequently found that out myself in the intervening time.

It seems so odd to explore the subject to find that being in the black is actually unadvisable. I was also surprised to see just how much the UK accrues in taxation revenue over the course of a full five year term, it little wonder there isn't as much of an urgency at the top to repay debt when it would be so easy to do so.

What a strange world, the wider public really doesn't understand numbers.

 

[Dave In Capital]

It isn't that being in the black is unadvisable; it's that it isn't as critical to growth as maintaining target inflation. So, there would be nothing wrong with raising the tax revenue to reduce debt as long as GDP remains steady. For example, since lower and middle class consumerism is 3/4 of GDP, growth would supposedly remain steady if the tax increases were levied on the higher brackets. This revenue model is known as progressive taxation. Macro theorizes that jobs are created when redistributive policies act as a backstop against anti-competitive practices.

 

[upingo]

My view was that taxes are levied enough, and that debt repayment would come from exiting revenue sources, only less spending on government funded services, i.e. monies for debt repayment would be found from across the board flat rate cuts.

I was also surprised that at the rate of 10% it would be so wasteful as not even be worth bothering with (especially as governments cannot survive on taxation alone) because of the interest on the existing debt, with repayments only beginning to make sense from 20% onwards:

YEAR IN OFFICE	DEBT + INT : 2.7% (£bn)	TAX : RATE (%)	MONIES RAISED (£bn)	NEW DEBT TOTAL (£tn)
1	1,731 (+48)	20	154	1,625
2	1,625 (+44)	20	154	1,515
3	1,515 (+41)	20	154	1,402
4	1,402 (+38)	20	154	1,286
5	1,286 (+35)	20	154	1,167

TOTAL : 5 YEARS	ORIGINAL : £1,731tn	RATE : 20% (annual)	PAID : £770bn	REAL DEBT PAID : £564	INTEREST : £206 (less !)
	CURRENT : £1,167tn		TOTAL TAX : £3,845tn (5yr)

GDP is an odd metric, as gains are not evenly distributed, only a generalisation on overall activity. I was looking at the income and outgoings of the average household in the UK at £22k:

INCOME (MONTHLY)	TAX (deducted)	OUTGOINGS
1,500 (£22k)	280	600

REFERENCES
https://www.tax.service.gov.uk/estimate-paye-take-home-pay/your-pay
https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyear2020
https://www.ons.gov.uk/peoplepopula...ns/familyspendingintheuk/april2018tomarch2019


Purchasing power with inflation isn't going to move the needle on peoples lives at the bottom. I am a fan of reducing the tax burden on them, for example increasing their annual tax-free allowance threshold up from the current £12,579, but this would need to be made up elsewhere, and as the wealthy never pay tax if they don't want to, then it'll hit the poor in other taxes.

However, if tax revenue remains the same, and is used to pay off the national debt, then the lowest paid should notice their purchasing power increase, allowing those with the least savings to save more. It might not grow GDP, but what does that matter anyway, if not borrowing so heavily, isn't that what growth is for, to continue borrowing ?

 

[Dave In Capital]

To be clear the links you provided specifically support the third table in your post.

If you're going to question GDP then that's another discussion. But for the record it is the accepted metric for determining recessions.

The economic model you're proposing assumes that a 10% cut in public expenditures will not have a ripple effect. But there is no empirical data which would support that prediction. And, since public expenditures sustain GDP, and since the 10% cut will be compounded by the multiplier effect, a reduction of that size will hurt job creation. You mention that public expenditures include debt service. A reduction in debt service would devalue the £. That in addition to a recession from the scaling back of public services would result in stagflation, which is a disastrous economic scenario. That's if you consider Keynesian ie macro economics a valid academic discipline. While it is the default economic doctrine of most of the world's leading economists, there are other schools of thought of course. It's an individual preference.