'Austerity' is a big con

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Austerity London"And if all others accepted the lie which the Party imposed -- if all records told the same tale -- then the lie passed into history and became truth" -- George Orwell, 1984

Austerity is the word of the moment, but last week the inter-dealer broker Tullett Prebon cast doubt upon Britain's austerity programme by claiming that it is nothing more than "a spin job" that is designed to deceive the markets, and that the government's claim that public spending has been cut is "bare-faced deception".

Tullett Prebon is right. Despite the huge amount of wailing and gnashing of teeth by special interest groups over "savage cuts", the figures state that the total annual public spending in Britain is £22 billion more than in 2008, and much of this has come from taking on even more debt.

While there have been substantial cuts to some spending programmes -- most notably defence, where we apparently still have enough money to build two aircraft carriers but not to buy the aircraft to put upon them -- the state continues to be addicted to increasing public spending.


The problem with democracies
In a democracy, groups of voters are incentivised to vote for political parties who promise to give them free stuff, which they will pay for by taxing someone else. George Bernard Shaw warned us of this when he said: "The government who robs Peter to pay Paul can always depend on the support of Paul"; but nowadays most political parties see this as a manifesto commitment rather than as a warning.

Since governments generally can't raise enough in taxes to meet their spending promises, they end up borrowing the difference and these accumulated budget deficits eventually create a national debt that is so hard to service that it becomes a drag upon economic growth.

Whenever any government spending is cut, the benefits (lower taxes) are widely dispersed while the detriments (less money spent on one group of people) is concentrated among a much smaller number of producers and other beneficiaries. They make lots of noise about the cuts and, since protesters make for much more interesting media coverage, they get the lion's share of the attention.

Please lie to us and spin everything
It's not exactly a state secret that politicians are prone to telling lies and half-truths, but in the last few decades they have turned it into an art form. They're encouraged to do this by the large number of voters who don't want to consider unpalatable alternatives, such as the fact that there is no "magical money tree" where resources can be conjured out of nowhere or that the world doesn't owe any of us a living.

Britain is also still coming to terms with a coalition government where mixed messages emerge on a regular basis. This is because the Conservatives and Liberal Democrats are both trying to spin the news to try and ensure they appear in the best possible light, while the other side gets all of the blame for unpopular policy decisions.

If you've ever seen the Danish television series Borgen, you have a head start when it comes to understanding the politics inside a coalition government. The show focuses upon a newly elected Prime Minister who discovers that holding together a coalition of several parties is about as easy as herding cats. Naturally, one of the most important characters in the show is her personal spin doctor!

The investment angle
Eventually, if the deficit isn't reduced dramatically then the bond market will take control and impose massive public spending cuts by demanding higher yields on gilts (British government debt). Thankfully, the average gilt matures in about 14 years, so we aren't under the same pressure as countries like Italy whose national debt has a much shorter maturity and is thus coming under more pressure to balance its books.

But as we've seen in the last few years, through the Bank of England's quantitative easing programmes the current and previous governments have deliberately stoked inflation in order to devalue the national debt. This doesn't exactly bode well for cash deposits or fixed-interest bonds, which is why I've been stocking up on National Savings Index-Linked certificates, which unfortunately aren't on sale at the moment.

To reduce my exposure to Britain, nowadays I tend to invest in foreign companies and British companies that have large overseas interests, such as Diageo and Unilever, two excellent examples of British companies that do most of their business overseas.

A company that does the vast majority of its business in Britain has to be quite special in order to tempt me to buy its shares. Two such companies are reporting this Wednesday, when I'll be taking a closer look at their results.

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