UK Economy: UK Budget 2009 Points Way to World Debt Mountain
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It may be a ‘liars budget’, but it has worrying implications for taxpayers worldwide
London, 29 Apr. The dust has settled somewhat after the uproar caused by the UK Budget when it was announced last week by Chancellor of the Exchequer Alastair Darling. It has immediate implications in the politics of Britain and the future of Prime Minister Gordon Brown and the Labour Party. On cue, the British papers had a field day. It also has longer term implications for all of us, an early indicator of the mountain of world
debt being built up and its implications for all of us.
The uproar was caused by the less-than-straightforward way in which the economic forecasts of the UK budget were calculated and the remedies presented. The Economist said that the budget was a ‘dishonest piece of pre-election politicking’. They suggested that Brown and Darling should have levelled with the British public and held their hand as they guided them through this difficult period, rather than try to bluff and get ‘tribal’.
There were too major issues. The first was that the budget based on over-optimistic projections. It assumes that GDP growth will resume again at the end of this year and hit 3.5 per cent in 2011, a prediction that no other economist or international organisation shares. It also assumes that spending growth will be capped at 0.7 per cent per year – but only after the election.
Even more galling to some was the resort to ‘class warfare’. There was a suggestion that by raising the tax rate of the top 2 per cent of the population from 40 per cent to 50 per cent, the rest of the country might escape. After all, the bankers and their fat cat friends caused the problem, so let them pay for the fix. The fact is, however, that the debt mountain the UK and indeed the world is gargantuan, and will be paid back by all taxpayers for many years to come. Some think tanks say that the budget hole will be £45 billion by 2017, and will need to be filled by both tax rises and spending cuts. Our children, it seems, will be paying for our folly.[br]
Leave aside for a minute the fact that Gordon Brown is losing trust and looks increasingly unlikely to win the next general election as Labour leader. Beyond the domestic concerns there is a global story. The UK had a very high exposure to the Financial Crisis thanks both to its oversized financial sector (which contributed 25 per cent of corporate profits from 2002 to 2007), and its property price bubble, which was one of the biggest in the world. It has fallen quicker than most, but may well recover quicker too, and may give us a sense of the shape we will all be in on the other side of this crisis.
The IMF forecasts that UK GDP will fall by 4.1 per cent, worse than the 3.5 per cent forecast by Alastair Darling, but not as bad as the 2009 GDP forecasts for Japan (6.2 per cent), Germany (5.6 per cent) and Italy (4.4 per cent). Ironically some of its weaknesses now become strengths. Its lack of manufacturing means it is less affected by the drop in trade, while its strong export markets, such as pharmaceuticals and aerospace, are less cyclical. Another irony has been that the collapse in the value of sterling, a 27 per cent decline, has boosted exporters, local manufacturers and the tourism sector.[br]
However there is a cautionary side to the tail. When Gordon Brown was Chancellor, he practiced thrift – at least at first. In later years, he embarked on massive public borrowing for major spending programs. Debt was just under 40 per cent of GDP before the crisis, but it was already growing. In 2007 for example there was a deficit of 2.4 per cent of GDP. Even the optimistic forecasts of the Treasury are for debt to reach 80 per cent of GDP by 2013, and the reality could be closer to 100 per cent.
The sobering thought for all of us is that although the decline in the UK’s public finances may be the worst in the G7, its projected debt is around average. Where the UK goes, the developed world follows. Add to this debts that are often much higher in developing countries still building basic infrastructure, and you have a picture of global debt ballooning, with the net effect of higher taxes and probably higher inflation, squeezing not just the fat cats but the mangy dogs and the rest of us in the middle too.
Umberto Osman, EconomyWatch.com
