Monday, July 21, 2008

Look after the pennies

At long last someone at the Telegraph is starting to "get it".

When a country, like a household, is in financial difficulties, it has two options: to increase income or cut spending.

Essentially, that is all managing the economy is about - balancing your spending against your income. Despite all the complicated talk and waffle about "fiscal policies" and what have you, managing an economy is not rocket science. Dickens sums it up nicely in David Copperfield.

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Every housewife and homeowner understands this. They also understand that when spending threatens to overtake income you have to reduce your spending - and that means cutting back on things that can no longer be afforded. It's simple - we all do it.

Taking out a loan to cover the gap might seem like an attractive option at first, but - again - we all know that ultimately that will come back to bite us if that spending is still not curtailed. Johnston makes this point very clear in his article before pointing out some areas where public money is apparently being squandered.

We have come to a pretty pass where a loss of £1.5 billion and the admonishment of the public auditor can be virtually shrugged off. Have we become so inured to waste on such a colossal scale that we no longer care?

Then the revelation hits him.

Or are the numbers too big for us to grasp?

Yep - that's it old fruit. The truth is that government finance now encompasses figures so huge they are utterly incomprehensible to people. Our minds just can't contemplate those sorts of sums of money.

In a nation that has over a trillion pounds of personal debt and where some £130 billion pounds are spent on quangos, sums of a few million or even one or two billion become trivial.

This is why I believe it is desirable - even necessary - to revalue our currency by a factor of 10 so that £10 becomes £1 as it brings the concept of "value" back into focus.

Imagine you win £10 million on the lottery. You want to buy a nice yacht so splash out £2 million on something special. You still have £8 million left over so everything seems good.

But if that £10 million was just £1 million and the yacht cost £200,000 - your remaining money is now just £800,000. Exactly the same proportionally, but it brings the value of the yacht into perspective. Suddenly the idea of spending a fifth of your winnings on a yacht doesn't seem such a good idea.

This is how our minds work. When the sums of money become so large that even enormous sums of money seem trivial then the result is excessive spending and waste. The value of money becomes lost in the huge sums. When it comes to the concept of "value" those sums don't even have to be that great.

If you drop 50p down the drain you might be annoyed about it briefly, but so what? You've still got £10 in your pocket so losing 50p might be annoying, but it's no big deal.

That's how it is with government spending. If you lose a billion here or there, who cares? There are another 600 billion in the coffers so it's not a lot to lose.

We all do it. The bigger the sums of money the more we waste.

Go back to that example of the 50p down the drain again. Suppose it was 5p and all you had was £1 in your pocket. Suddenly, losing 5p down the drain IS a big deal. Now you realise that every penny counts.

Now you understand the value of money.

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