Some are more equal than others!

As an accountant I like to think that I understand the concepts of business, finance and economics but the concept of Capitalism is steadily, for me, starting to become a mystery. The basic concept of Capitalism is that everyone should be able to gain rewards for their own labours and in a free market be able essentially buy and sell anything they wish in the hope of making a profit. However, in those nations which claim to be based on the free capitalist principle laws have been created which essentially control and bring some level of socialism (i.e. State provision to everybody regardless of means) to moderate the extremes. To do this Nations are run as businesses in their own rights essentially selling public services in return for payment. The difference between the National model and the Capitalist model is that the sale price of those services is driven to a large degree by ability to pay. Ergo the National income of taxes is geared to levels of income and spending.

The socialist side of the National business comes about because the Government decides what services it will provide and the customer (in theory the tax payer/resident/citizen) has to pay regardless of whether they want/use the service. We currently are seeing legislation to try in some way to restrict the access to public service to those who have right to them; but that is not my main concern.

As I said at the beginning of this thought flow Nations are essentially run as businesses and have to manage their finances in the same way as any business, and for that case any individual too. This means the management of cashflow and of the balance sheet.  We are aware that the UK has for the last generation been running on a deficit each year and Wilkins Micawber‘s saying about overspending and misery comes to mind. After all the current Government is preaching that we need to go through a difficult period to come out the other side.

The problem I have with the principle of Government finances is there removal from the reality of personal and business finance. We are seeing the reckless lending of the banks to individuals and businesses of the past being reeled in and even the Government with its assistance for home buyers emphasising not only the ability to service but the ability to repay debt. The USA now has a problem that it again needs to increase its allowable debt ceiling and this highlights the issue I have with Government finances.

Politicians seem to consider it a massive success if they can even match their income and expenditure but never in their wildest dreams do they consider repayment. They look at debt as a percentage of National GDP and therefore so long as GDP goes up they seem to be happy to borrow more – this is exactly what has lead in some degree to our individual debt problems in the UK. The value of our house went up so we borrowed more money against that value and then spent it on day to day expenses.

A time must come when Nations, UK included, need to repay their debt not just service it and the only way to do that is to spend less than you earn. Many of the large corporations are sitting on large cash reserves I look forward to the day when politicians aim for the Country to do the same.