Two elementary mistakes
Mark Bathgate 4:48pmThe warnings from around the world about the scale of the UK’s government debt crisis keep flowing in. Following last week’s warnings from the IMF and European Commission about the scale of the UK debt crisis, credit rating agency Fitch has described the UK as the AAA country most vulnerable to a downgrade. The table at the bottom of the page shows the European Commission’s forecasts for Government deficits as a share of GDP for next year. The UK beats IMF bailout case, Latvia, to head the league table with a deficit level almost double the EU average. The Commission estimates that the UK’s total debt will have almost doubled from 43% of GDP in 2007 to over 82% in just 3 years, moving the UK quickly towards the top of the EU debt league table.
The IMF’s most recent warnings to the UK on Government deficit levels focused on the severity of structural debt problems that the UK has relative to most other developed nations. The chart above shows that the UK is rivaled only by Ireland in having the worst structural government finance position in among the G20. A structural deficit is the amount of government borrowing that would likely occur outside of recession – ie the underlying gap between tax revenues and government spending levels.
How did the UK end up with the worst Government debt position in the world so quickly? Two very basic beginner’s mistakes in economic management were made over recent years.
The first was to assume that tax revenues from the credit and housing bubble were sustainable and increasing government spending on that basis. When economies have a boom driven by household borrowing and house price rises, tax revenues from banks, property taxes and capital gains tend to soar. When the inevitable downturn comes, they normally fall away quickly. The European Commission estimates that 60% of the government deficit increase is driven by the dive in tax revenues. This pattern has been repeated many times over the past 50 years, hence treating tax revenue increases and debt accumulation with care in a boom is a core part of good economic management practice around the world now. Only a true believer in the end of boom and bust would ever rely so heavily on the permanence of this transitory surge in tax revenues to fund a much larger government sector.
The second basic error was running a large deficit at the height of the boom. The UK hit the downturn with close to the largest running deficit in the world. As the European Commission point out, this left the UK unable “to pursue a looser fiscal stance without compromising budgetary sustainability”. Failing to save for a rainy day in the face of the one of the biggest ever run ups in personal debt and banking leverage left the UK uniquely weak to meet the global downturn.
When the huge hit of absorbing the losses of the banks is added in, the UK is suffering from an increase in Government debt wholly unprecedented outside of wartime. Government debt levels have moved well into the territory more associated with IMF bailouts than an AAA credit rating, as the credit rating agencies are making increasingly clear.
The tidal wave of debt that Gordon Brown unleashed may have carried him across the threshold of No 10, but it is drowning the UK economy today.
EU Government deficit estimates as % share of GDP 2010
UK - 12.9
Ireland - 12.5
Latvia - 12.3
Greece - 12.2
Spain - 10.1
Lithuania - 9.2
France - 8.2
Portugal - 8
Poland - 7.5
EU Average - 6.9
Slovenia - 7
Romania - 6.8
Netherlands - 6.1
Slovakia - 6
Belgium - 5.8
Czech - 5.5
Austria - 5.5
Italy - 5.3
Germany - 5
Denmark - 4.8
Finland - 4.5
Estonia - 3.2
Previous
Irene
November 10th, 2009 5:31pm Report this commentSo why isn't this front page stuff?
ian cooper
November 10th, 2009 5:45pm Report this commentGordon's failure was to lose sight of risk - exactly what the bankers did! Yet he blames them day-in day-out.
In2minds
November 10th, 2009 6:11pm Report this commentWay off topic yes, but I see the UK is well down here and Norway is not. As Norway is not in the EU any chance of being told the reason why Norway is doing OK?
Victor Southern
November 10th, 2009 6:33pm Report this commentHow on earth does Iceland become part of the G20? It is a tiny nation.
oldtimer
November 10th, 2009 6:33pm Report this comment...And we are asked by Brown and co to believe that it all started in America. Made in Downing Street more like.
Robert Eve
November 10th, 2009 6:44pm Report this commentDespite this millions of people will vote Labour at the GE.
Frank Leader
November 10th, 2009 6:45pm Report this commentIf we ever get into another mess like this in the next 20 or 30 years. Borrowing our way out will not be a option. We will still be paying off the Debt Mountain left by 'Prudence Brown'.
Koakona
November 10th, 2009 6:52pm Report this commentI love how people always seem surprised by such statistics or even the analysis which flows from this. Really it should be taught in primary school alongside 2+2=4
Labour + Government = Massive Budget Deficit
Moraymint
November 10th, 2009 7:59pm Report this comment" ... only a true believer in the end of boom and bust would ever rely so heavily on the permanence of this transitory surge in tax revenues to fund a much larger government sector ..."
And to think: the Labour Party wants to arrange things such that MPs don't have jobs out here in the real world - where such elementary economic mistakes guarantee corporate and personal ruin.
Is it any wonder we're in such a mess, when so few of our political class would appear to have the faintest idea how the management of other people's money must be made to work in practice.
Marxism in action. I wonder if the British people will ever learn that the sooner the Labour Party is consigned to oblivion, the sooner we'll end this ludicrous cycle of macro boom and bust, where the Marxists wreck the economy and somebody else - usually the Tories - fix it.
The difference this time is that Gordon Brown has provided an absolute masterclass in breathtaking economic incompetence and political gangsterism.
Even two world wars couldn't match Brown's destruction of our economy, so God only knows how and when we'll recover from this one. Especially when one considers that the end of mankind's era of cheap energy (pretty much with us here and now) marks the end of economic growth as we have come to know and love it (= consumerism).
http://tinyurl.com/yhmtkgb
http://tinyurl.com/ydvd24k
http://tinyurl.com/ydtxxy8
We're entering a new era where if we don't figure out how to make sustainability work (and that means paying off our debts), we're stuffed.
Jonathan_T
November 10th, 2009 9:32pm Report this commentIn2Minds - In the short term, Norway's position is less to do with the EU and more to do with oil revenues. (Which are substantial and spread across a relatively small population.)
Of course, there is an argument to be had about how much inefficiency / economic loss is generated by EU policies, but no idea what the comparable numbers are for the UK and Norway.
Gawain
November 10th, 2009 9:37pm Report this commentIt is a remarkable sort of dysfunctional genius. Every Labour government manages to ruin the economy. Measured by his predecessors, Brown is just a more extreme example of the species. Only this government could manage to institute a car scrappage scheme as part of a rescue plan which props up the German and Japanese manufacturing base at the expense of this country's trade deficit !
T .England
November 10th, 2009 10:07pm Report this commentCould you not publish the last post with the email?
Thankyou
T .England
November 10th, 2009 10:09pm Report this commentI'll try again!
” Two elementary mistakes”
If only that were all Brown had made!
The man seems get everything wrong, from no more boom & bust to spelling a brave soldiers name wrong, what can you say? Brown is wrong, always wrong, always very wrong! He’s never correct & to top it off he seems void of normal human emotion, he’s so out of touch with the public you have to wonder if he gets charged up of a night!
I get panic attacks thinking this man still has control over stuff!
Amadeus Plonquer
November 11th, 2009 5:58am Report this commentUnfortunately in these dark days of New Labour the biggest problem is not loss of sovereignty. Not economic calamity. Not an immigration free for all. Not even crime ridden streets. No. The greatest loss is to our edukashun system. As was asked above, can't they see that
2 + 2 = 4
Well, in this wonderful Socialsit paradise of Britain under New Labour. 2 + 2 = 4 only if it wants to be. Otherwise we'd be discriminating.
Gareth
November 11th, 2009 7:04am Report this commentAlex Massie thinks we're being a bit over the top here - Gordon's not that bad!!
Alex you need education, education, education.
Austin Barry
November 11th, 2009 8:22am Report this commentOn checking the graph we here in Ireland can only envy Gordon's masterful stewardship of the UK economy.
Chris lancashire
November 11th, 2009 8:57am Report this commentIn answer to Irene, it's off the front page because we are living with it and everything seems to be OK. Except it's not; the slightest economic shock will cause huge repercussions. For example, a debt downgrade will cause an instant rise in govt. interest rates and a serious run on the £ which will stoke inflation which will cause an increase in Base Rate which will result in slower recovery .....
We are just waiting for such a shock and please let it come well before an election.
NorthernJohn
November 11th, 2009 12:15pm Report this commentDon't Eurozone countries get fined if they go above 3% budget deficit?
2trueblue
November 11th, 2009 1:26pm Report this commentWell, we are top of a list, that must be worth something.
Moraymint, you say 'we are entering a period where if we don't figure out how to make sustainability work..........we're stuffed.
If we don't make people work we are stuffed. We need to get people back to work and to spend money to do so is a must. If we do not get the whole work ethic back on the agenda for a large chunk of our population we are totally doomed.
Chrisc
November 11th, 2009 4:08pm Report this commentJonathan_T & In2Minds.
Also to do with the fact that they have strict limits on spending any of that vast oil funded cash reserve which they regard as belonging to future generations of Norwegians.
Ian Hill
November 11th, 2009 4:53pm Report this commentI pay a lot of attention to Credit Rating Agencies like Fitch. They have such a good track record.
biggestaspidistra
November 11th, 2009 4:54pm Report this commentDidn't Estonia do well!
michael
November 12th, 2009 12:49pm Report this commentNightmare from Drowning st.
wakey wakey...
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