January 21, 2010
By Stephen Murgatroyd
EDMONTON, AB, Jan. 21, 2010/ Troy Media/ — The British government is in trouble.
In 2007 Britain’s national debt was 44 per cent of GDP and the cost of insuring it was approximately£5,000 for each £10 million of securities they issued. In 2014 Government debt in the UK will be 75 per cent of GDP and the current cost of insuring £10 million of the securities needed to underwrite the debt is £72,000.
To manage its debts, the government is relying on the Bank of England to print money (euphemistically called “fiscal easing”). Unfortunately, the debt rating agencies, which are concerned that, sometime soon, Britain will default on its debt, aren’t buying into its solution and are threatening to lower its debt rating.
The challenge of both reducing debt while encouraging an economic recovery is becoming a focus for the upcoming election, expected to be held in May. Britain has over two million unemployed, with some one third of adults receiving one form or other of welfare payments. Two million children in Britain are growing up in homes where no-one works. At this point, 7.5 per cent of GDP is spent on welfare provision.
What options does an incoming government have in terms of reducing its debt load while stimulating the economy? Not many, and none of them are attractive.
Option 1: The first is to cut programs in this vast welfare state while at the same time raising taxes. This is the option favoured by the Conservative Party. Its Shadow Chancellor, George Osborne, has indicated that cuts will begin in its first week in office, should the party win the election. However, for reasons of political expediency, it has already protected some key budgets – especially health. Labour has also indicated that they will seek to reduce public spending in a “measured and planned” way – seeking to contrast their way of cutting with that of the Conservative Party. Their strategy is to freeze public spending at 2011 levels for five years. This does not take full account of the fact that there are structural problems with the UK government budget – there is a permanent gap of some £90 billion between spending and income.
Option 2: The second option is to encourage inflation, which would wipe out the value of the debt, making it easier to pay off. Such a strategy, however, has consequences. It doesn’t just wipe out debts, it wipes out people’s hard-earned savings and increases the number living in poverty, expanding welfare and creating additional government spending. It also leads to sizeable wage claims and labour unrest.
Option 3: Seek assistance from the International Monetary Fund (IMF). Britain did this in 1976 when Dennis Healey was Chancellor and Harold Wilson was Prime Minister. Healey asked the IMF for a £2.3 billion bail out, pointing out that unemployment and inflation were at exceptional levels, although the unemployment rate was notably lower then than it is now. The IMF, however, does not just loan funds – it does so with conditions, usually associated with severe public spending cuts and wage constraints in the public sector.
Option 4: Britain could just default on its debt. Not pay it. Other countries have done that in the past, but rarely have these been G8 countries. The immediate impact would to make borrowing by British-based organizations, especially public ones, both more difficult to obtain and more expensive in terms of interest rates and insurance against non-payment. While all parties mention this option and dismiss it out of hand, if implemented Britain’s credit rating, already under constant “watch” status, would be lowered.
Whatever actions are taken by whichever government wins power in May, it is not likely that Britain’s debt will be under control and back below a “safe” level (40 per cent of GDP) until 2032, according to the Institute of Fiscal Studies. Even this scenario assumes a significant increase in taxes and cost cutting along with a rise in inflation. Some analysts are even suggesting that it may take until 2040 to bring spending back in control.
Austerity is the new reality show in Britain. It is likely to be “on air” for at least 25 years.
Channels: The Montreal Gazette, the Calgary Beacon, January 23, 2010