Debt on the back of a fag packet

By Justin Urquhart Stewart 09:21 3- Aug -2009

£950 billion is quite an eye watering sum of money – and of course it also happens to be the latest figure of our UK government debt for this year.

This is the equivalent of 56% of total UK GDP and the highest since our records began back in 1974.  It is forecast to climb to £1.1 trillion in the next financial year.  A number that has so many zeros and commas that I am worried that people will start talking about the British Lira rather than good old Sterling.

Source: HM Treasury

Like any debt, of course, we will be expected to tell our lenders how we are going to pay it back. Unfortunately as yet no-one seems to have come up with any sort of reassuring plan which will grant succour to those who may be more nervous UK government investors. Every day that goes by when we cannot effectively describe how we are going to dig ourselves out of this hole, will further create concern and put pressure in the confidence of our government, our economy and of course our already weakened currency.

Perhaps I could put some of these debt issues into some perspective. We all know what it is like paying off credit cards and how much interest we pay, but when it comes to government and national debt it seems somehow separated away from reality and thus we have no real understanding of just how much this is costing us.

From the government’s own website (www.hm-treasury.gov.uk)   we can find out just how much interest we are having to pay, and it reveals that for this year we are probably going to be paying some £31 billion in interest – which by the way is the equivalent of £84 million each day – and if you thought that wasn’t enough, it will be rising further to £43 billion next year which works out as £117 million each day - including weekends! Perhaps people may like to revisit Mrs Thatcher’s disciplines of trying to drive down debt so that not so much public money is wasted just on funding costs.

To complete my depressive nerdy behaviour we can also divide the debt around the entire population of around 60 million, and thus end up with an individual debt for us all of £13,316 each.  Cheques by return please.

However, of course for those of us with smaller budgets there is a not dissimilar problem developing. Although as yet not on the scale of the US, the UK has developed an unpleasant “habit” of credit card debt. As both unemployment and personal insolvencies rise, so inevitably will the levels of defaults and losses.  In fact the latest figures from a ratings agency show that the “charge-off” rates have risen from 6.4% last year to 9.37% - that’s not far off the US figure which is over 10%. This in turn will create further problems for certain banks like Lloyds who will have to bear the write-off themselves and have been unable to include the numbers in their toxic loan insurance they agreed with the government. This will have a long tail with it – longer than the tail of rising unemployment I suspect.

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The most recent news from the UK railways just underlines the general view that our system is a mess. Now I am no fan of the old British Rail. All those who go soppy eyed at the very mention of our nation’s nationalised railway system really should recall just how atrocious it was - filthy trains, usually late and food that should have appeared in an Attenborough wildlife film.

With privatisation there have been some very significant improvements in service, reliability, comfort and even food.  Of course it still has the ability to wrong and when it does it tends to do so in the most spectacular way. However generally the inter-city lines are much better with Virgin and even the east coast line run by no-one in particular at the moment, are great rides with generally very good service.

However, the structure of the new railway system is a mess. Designed in a rush by a dying Conservative government, they managed to create an operational camel. Firstly there was Railtrack which controlled the lines and operating systems, and in effect becoming the longest and thinnest property company in the world. It was always going to struggle to make up for the years of under-investment by all the governments of all political colours, but nonetheless managed to magnificently fulfil most people’s low level of expectation.

 Then there were the railway franchisees (the TOCs ,Train Operating Companies), who were in effect a muddled group of travel companies including bus companies and an airline with little experience of railways, and finally the 3 Rolling Stock Leasing Companies (ROSCOs), Angel Trains, Porterbrook Leasing, and Eversholt Trains (later HSBC Rail), which were allocated all of British Rail's passenger coaches, locomotives, and multiple units.

The reason to have three of these was decided by the civil servants on the basis that two wouldn’t be enough competition but three would do. What twaddle, and instead of creating a market for the provision of railway kit which could bring prices down, they all specialized in their own areas and effectively created their own monopolies. That’s why you still see ancient “bus like carriages” commuter trains still teetering around stations that haven’t been replaced and cost a fortune in rental from their ROSCO.

Time, then, for a significant rethink. This time it should include all the benefits of the private market as we have seen from the more successful operators - but probably with much longer leases to make them viable, along with their watchdog. Then also time to reform the equipment providers and to break up their cosy cartel and have a blast of real competition and pricing value.

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And finally....................I am deeply indebted to my friend Jonathan Rounce for providing me with my last ‘and finally’ before I totter off for two weeks to Tuscany.

Outside Bristol Zoo is the car park, with spaces for 150 cars and 8 coaches. It has been manned 6 days a week for 23 years by the same charming and very polite car park attendant with the ticket machine. The charges are £1 per car and £5 per coach. On Monday 1 June, he did not turn up for work. Bristol Zoo management phoned Bristol City Council to ask them to send a replacement parking attendant. The Council said "That car park is your responsibility."

The Zoo said "The attendant was employed by the City Council... wasn't he?"
The Council said "What attendant?"

Gone missing from his home is a man who has been taking the car park fees amounting to about £400 per day for the last 23 years...!   Circa £2.8 million……….cash.  Now that is what I call an impressive scam – imagination, style and playing the long game.

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited