But the drumming does not end here; a critical article in bloomberg:
Brown’s ‘Scorched Earth’ Budget Leaves Cuts for Next Government
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By Reed V. Landberg
Aug. 21 (Bloomberg) -- Prime Minister Gordon Brown is fighting the U.K.’s deepest recession in a generation with the biggest buildup of government debt on record, aiming to put off paying the bills until after his re-election campaign.
The 8 billion-pound ($13.2 billion) monthly budget deficit in July reported yesterday pushed up public debt to 801 billion pounds. That equals 56.8 percent of gross domestic product, the most since comparable records began in 1974 and more than when the U.K. received an International Monetary Fund loan in 1976.
“It’s scorched earth,” said Michael Ben-Gad, deputy head of the economics department at City University in London. “Whoever gets into government next will have to make very large cuts in services and also raise taxes. You’ll end up with U.S. levels of services and Scandinavian levels of tax.”
Britain’s 2010 shortfall will lead the Group of 20 nations and require tightening the fiscal purse by the same amount that John Major managed during the last Conservative administration between 1992 and 1997, according to London’s Institute for Fiscal Studies. That followed a recession and the pound’s ejection from Europe’s fixed exchange-rate system.
The Treasury in April said it will sell a record 220 billion pounds of gilts this year, quadruple the average between 2003 and 2008. That spurred Standard & Poor’s to threaten Britain’s AAA credit rating. The Bank of England is buying 175 billion pounds in bonds, supporting debt prices.
“Gilts remain highly vulnerable as and when support from the BOE’s huge buying program ends,” said Michael Saunders, chief western European economist at Citigroup Inc.
Gilts, Pound
So far, markets are absorbing Britain’s bonds. Yields on two-year gilts fell to 0.98 percent yesterday from 1.53 percent on June 11. The pound has appreciated 20 percent to $1.65 this year. That’s unlike 1976, when the pound tumbled and the government had trouble selling gilts.
“The difference now is that it’s happening across the world -- it’s not unique to the U.K.,” said Iain Begg, a professor at the European Institute of the London School of Economics.
Brown is putting off until after the election, which must be held by June, the cuts needed to put British finances on the path to recovery.
The next government must slice spending and raise taxes by the equivalent of 6.5 percent of GDP, or about 90 billion pounds in today’s money, according to Carl Emmerson, deputy director of the IFS. That’s more than double annual spending on defense and almost quadruple the transportation budget.
Tax Increases
The Treasury has announced tax increases on incomes above 100,000 pounds and fuel duties that will make up about 10 percent of the total, leaving spending cuts to absorb the rest. Emmerson said that “will be the hardest period” since the IMF imposed curbs on the U.K. in return for emergency funds in 1976.
Britain’s deficit will touch 13.3 percent of GDP next year, the most in the Group of 20, according to an IMF forecast on July 30. This year, the shortfall of 11.6 percent will be second only to the U.S. deficit of 13.5 percent, the Washington-based lender estimates.
Conservative Party leader David Cameron, who has led the Labour Party in opinion polls since October 2007, criticizes Brown without saying how -- or when -- he’d cut the deficit. He says his party would protect spending for the National Health Service, troops in Afghanistan and overseas aid.
“You run the risk of not being able to meet your obligations,” Cameron said in London on Aug. 18. “I’m not predicting that it’s going to happen, but as government borrowing goes up and up and up, you start running that risk.”
Supporting Workers
Chancellor of the Exchequer Alistair Darling says the Treasury is right to run up debts to support workers as the unemployment rate touched 7.8 percent, the most since 1996.
He’s also extending 1.4 trillion pounds, equal to the GDP, to support the financial system and institutions including Royal Bank of Scotland Group Plc, based in Edinburgh, and London-based Lloyds Banking Group Plc.
Bank of England Governor Mervyn King, who on June 24 stressed bringing a “truly extraordinary” deficit under control, this month sounded in tune with Brown.
“Recovery could be slow and protracted,” King told reporters on Aug. 12. “The public sector, having cushioned the slowdown in spending, will over time need to adjust its finances to a more sustainable position.”
The economy shrank 5.6 percent from a year earlier in the second quarter, and may start growing again in the current quarter, the Bank of England forecast this month. The central bank expects GDP to expand on an annual basis from the first three months of 2010.
Even when the economy revives, King may be able to hold the benchmark interest rate at 0.5 percent, the lowest since 1694.
Deficit cuts may shave up to 1.5 percentage points off growth as the economy recovers, said Roger Bootle, a former Treasury adviser who now runs Capital Economics Ltd. That, he said, may allow the Bank of England to leave rates alone for “a very long time.”
To contact the reporter on this story: Reed Landberg in London at landberg@bloomberg.net. |
