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Britain’s Financial Quagmire

Posted By Ted R. Bromund, Ph.D. On July 21, 2009 @ 1:48 pm In International | Comments Disabled

The International Monetary Fund has just published its annual “Staff Report” [1] on Britain’s economy. It makes for grim reading. The IMF projects that Britain’s national debt will grow from 43% of GDP in 2007/08 to 73% of GDP in 2009/10. Its budget deficit in 2007/08 was 2.4% of GDP. By 2009/10, it will be 12.8%. And even those projections, though more pessimistic than the government’s widely-panned forecasts, may be too optimistic: the most recent public borrowing figures [2] show that the pace of borrowing is accelerating as revenues fall.

All due to the recession, you say? Not so, say both the government and the IMF: “the structural component of the deficit is almost 10 percent of GDP, or about four-fifths of the total deficit in 2009/10.” In other words, the reason Britain is running such a large deficit is not to balance out the recession, or because of the decline in revenues. It’s because since 2002, expenditures have grown steadily faster than receipts.

The IMF – like a recent OECD study [3] – peppers its Report with opaque but dire warnings about what may happen if Britain fails to restore public spending discipline. As the IMF puts it:

The sharp increase in public sector borrowing and contingent government liabilities, together with continued financial sector fragility, are significant vulnerabilities. If there was a renewed and abrupt loss of confidence, possibly triggered from outside the UK, it could spark further financial sector instability, undermine faith in fiscal sustainability and unhinge inflation expectations, thus disrupting domestic and external stability. Although the probability of such a crisis is low, its impact could be substantial, highlighting the need for credible and consistent policies to limit downside risks and strengthen market confidence.

So how to reduce the deficit? One answer is to increase taxes. The IMF, instead, points out that, “although changes in revenue and expenditure contribute to closing the fiscal gap, expenditure restraint brings about longer lasting and larger adjustment episodes, which are more successful in achieving a debt stabilizing fiscal position.”

In short, if you want to balance a budget, the first thing you have to do is to stop spending so much. This keeps the hole from getting deeper and reduces the burden on the private sector. The only trick is summoning up the will to say no. Perhaps that’s why, with the Tories up by double digits in most polls, the IMF notes, coyly, that “elections tend to increase the likelihood of entering a consolidation episode.” If only we could say the same about the U.S.:  if the election of Barack Obama produced anything, it most certainly was not a fiscal “consolidation episode.” [4]


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URL to article: http://blog.heritage.org/2009/07/21/britain%e2%80%99s-financial-quagmire/

URLs in this post:

[1] “Staff Report”: http://www.imf.org/external/pubs/ft/scr/2009/cr09212.pdf

[2] most recent public borrowing figures: http://www.statistics.gov.uk/pdfdir/psf0709.pdf

[3] like a recent OECD study: http://www.oecd.org/document/55/0,3343,en_2649_33733_43092599_1_1_1_1,00.html

[4] fiscal “consolidation episode.”: http://newledger.com/2009/07/g8-on-summits-cynicism-and-the-activist-state/

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