How Broke Is Britain?
It is considered a golden rule in politics that Budgets that look good on the day, start to look poor by the weekend and vice versa. Last week’s Budget broke that rule. Even the dreadful borrowing figures announced by the Chancellor of the Exchequer last week – pushing the national debt well beyond £1trn – were not dreadful enough to describe the reality, as became clear within days, when a set of shocking GDP figures recorded a contraction far worse than expected. Over half a trillion pounds of borrowing is scheduled over the next few years.
It could easily be more. On the Government’s own forecasts, the public finances will come nowhere near balance until 2018. Some experts reckon we’re looking well into the 2030s or the 2050s. “In the long run”, Keynes famously said, “we are all dead”. But this is getting ridiculous.
The Chancellor has admitted the Government needs to borrow £220bn in the gilts market this year, just to keep finances afloat. After that, he claims, things will start to get easier. Really? Darling’s expectation that the economy will shrink by “only”3.5% this year already looks out of date. But this wildly hopeful assumption that this decline will somehow reverse into a growth rate of 3.5% in two years’ time seems preposterous.
Using the IMF’s more neutral economic forecasts, Monument Securities reckons Britain will have to tap gilt buyers for some £230-235bn this year and about the same in 2010/11. At the moment, the Government is having little trouble finding lenders: the increased supply of gilts is being soaked up by the Bank of England’s £75bn quantitative easing programme and by foreign buyers. But if investors begin to doubt the Government’s ability to close the deficit, the market’s willingness to refinance sovereign debt could come to a sudden halt. Epithets of “banana republic” and “sick man of Europe” may yet return to haunt the British.
Britain does have one advantage. It entered the recession with relatively low levels of public indebtedness compared to other countries. This means that, even with a dramatic surge in liabilities, it will end up with only a middling level of debt compared with G7 countries overall. Yet we shouldn’t take refuge in that. On some measures, Britain’s public finances are now the worst of any rich country: next year, we will probably have a bigger deficit, as a percentage of GDP, than the like of Italy.
Retaining market confidence calls for plausibility and willingness to forego overly optimistic forecasts. The only way out is to confront the problem head on. This dishonest Budget has done Britain no favours at all.