How Britain is using spin to con the bond markets

Austerity, austerity, austerity. The A-word is cropping up everywhere at the moment, whether in France or Greece or Germany. And the UK isn’t immune from it either. If there is anything on which Britain’s political factions agree, it is the reality of fiscal austerity. Whether it’s Ed Balls banging on about ‘too far and too fast’, or the coalition saying that their programme of painful austerity is essential if the UK is to defend its triple-A ‘safe haven’ status, this is something on which our political class has reached consensus.
 
But, as we at Tullett Prebon argued in a briefing paper yesterday (available here as a pdf), the tale of ‘big’ cuts in public spending is a bare-faced deception. Just look at the official Treasury numbers. They show that real public spending was just £8 billion (1.1 per cent) lower in 2011-12 than in 2009-10. This number, modest in itself, needs to be set against the big (£31 billion, or 4.6 per cent) increase in spending during Labour’s last year in office. At £681 billion, public expenditures in 2011-12 were £23 billion (3.4 per cent) higher than in 2008-09 (£659 billion).
 
The full scale of the ‘fast one’ that the UK has been trying to pull both on the markets and on the public is evident from looking at the two- and three-year records to 2011-12. Starting with the two-year period between 2009-10 and 2011-12:

— Real GDP has increased by only £40 billion.
— Of this, no less than three-quarters (£30bn) has been appropriated by the government.
— State spending has been cut by a paltry £8 billion.
— Public debt has increased by £218 billion.

Government, then, has mopped up most of the skimpy recovery in GDP for its own use, has made very modest spending cuts, and has added well over £200 billion to its debts.

The motivation for government spin is obvious enough, of course. On the one hand, rises in market interest rates could be a disaster, given the extent to which British households are leveraged. On the other, implementing the real cuts required to back up a genuine austerity package has proved politically unpalatable. It seems improbable that the bond markets (and the rating agencies) will continue to fall for this spin-job, and they are likely, sooner rather than later, to call the UK authorities to account.

Dr Tim Morgan is Global Head of Research at Tullett Prebon.