Published: May 7 2009 19:45 Last updated: May 7 2009 19:45
In 2010, according to the European Commission’s latest forecasts, the UK government will be spending 52.4 per cent of gross domestic product and receiving just 38.7 per cent of GDP in revenue. It will, as a result, have a gigantic general government deficit of 13.8 per cent of GDP. Worse, the UK’s cyclically-adjusted deficit will be 12.2 per cent of GDP. These are numbers one would expect in a time of war.
Only five of the 27 members of the European Union are forecast to have a higher share of public spending in GDP than the UK in 2010: Sweden (57.3 per cent); Denmark (57 per cent); France (56.4 per cent); Finland (54.3 per cent); and Belgium (also 54.3 per cent). But only six EU members will have a lower revenue share than the UK: Romania (33.3 per cent); Ireland (33.5 per cent); Slovakia (34.1 per cent); Lithuania (34.8 per cent); Latvia (36.2 per cent); and Spain (37.3 per cent). Just one member will have a bigger deficit than the UK: Ireland, on 15.6 per cent.
EDITOR’S CHOICE
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The forecast deterioration in the UK government’s fiscal balance, of 11.1 per cent of GDP between 2007 and 2010, is also the fourth largest in the EU, after Ireland (15.8 per cent), Latvia (13.2 per cent) and Spain (12.0 per cent). How did this fiscal debacle occur? The answer lies far more in spending, forecast to jump by an astounding 8.4 per cent of GDP between 2007 and 2010, than revenue, forecast to shrink by a more modest 2.6 per cent of GDP.
What makes the UK’s rise in government spending as a share of GDP puzzling is that the decline in GDP itself is not exceptional. The Commission forecasts the decline of UK GDP at 3.8 per cent this year, slightly less than for the EU and the eurozone, both of whose economies are expected to shrink by 4 per cent. In 2010, the UK economy is forecast to grow by 0.1 per cent, again slightly better than the EU and the eurozone, both on -0.1 per cent.
The painful conclusion must be that the UK has lost control over public spending. It has to get it back again. Whether they like it or not, UK voters will have to elect a government willing to achieve this end. Government solvency is at stake. The next government will, as a result, find itself in a war of attrition with its own servants. If David Cameron leads the Conservatives to victory, as many expect, he will have to be tougher than Margaret Thatcher, elected prime minister three decades ago.
It is possible, of course, that a powerful recovery will do the trick. In the Budget, the Treasury concluded that the UK had suffered a permanent loss of 5 per cent of GDP as a result of the crisis, while trend growth was 2¾ per cent. The Treasury also assumes the output gap – a measure of excess capacity – will peak at 5 per cent of GDP, then disappear.
It would be highly irresponsible to plan the public finances on the assumption that the economy will soon return to the level and assumed growth of the pre-crisis era. Indeed, I share the view advanced by Robert Chote, director of the Institute for Fiscal Studies, in a recent study, that the UK had an unsustainable boom. A part of the economy was an illusion.
It is possible to propose that, since the British now spend like the French, they should pay taxes like the French. But that would mean a huge increase in taxation – perhaps of as much as 10 per cent of GDP. While some increase in tax rates will be inescapable, to bring the ratio back to where it was before the crisis, the British are not going to accept a vast increase in the tax burden.
Nor is it reasonable to assume that such huge deficits can be run for long without risking big jumps in interest rates. The Treasury forecasts a rise in public sector net debt from 36.5 per cent of GDP in 2007-08 to 76.2 per cent in 2013-14. It is likely to end up higher. A prudent government would not only wish to halt this rise but also to reverse it, to renew the fiscal flexibility it is using up.
Government spending will have to be cut down to size. According to the IFS, the government has pencilled in the tightest spending plans over a seven-year period since April 1985 to March 1992: a 0.1 per cent annual average real increase from 2011-12 to 2013-14, followed by a possible 0.5 per cent annual real increase in current spending for a further four years. This is the least that has to be achieved, given the dire starting position. In effect, government spending may have to be stagnant in real terms for almost two successive parliaments.
That is what happens to a country that has not only spent freely, but now finds itself far poorer than it had hoped. It is clear what this must mean: a sustained freeze on the pay bill; decentralised pay bargaining; employee contributions to public pensions; and a pruning of benefits. It is obvious, too, that this will mean massive and painful conflict between governments and public workers.
Hitherto, the vastly increased levels of government borrowing have concealed the true extent of this crisis. But these deficits will have to be eliminated. The bulk of the action will have to come from control over public spending. The next prime minister is likely to end up quite as hated as Margaret Thatcher was. But, as she liked to say, there is no alternative. The unsustainable cannot endure. If UK policymakers do not take the needed decisions willingly, markets will force them upon them.
martin.wolf@ft.com
In 2010, according to the European Commission’s latest forecasts, the UK government will be spending 52.4 per cent of gross domestic product and receiving just 38.7 per cent of GDP in revenue. It will, as a result, have a gigantic general government deficit of 13.8 per cent of GDP. Worse, the UK’s cyclically-adjusted deficit will be 12.2 per cent of GDP. These are numbers one would expect in a time of war.
Only five of the 27 members of the European Union are forecast to have a higher share of public spending in GDP than the UK in 2010: Sweden (57.3 per cent); Denmark (57 per cent); France (56.4 per cent); Finland (54.3 per cent); and Belgium (also 54.3 per cent). But only six EU members will have a lower revenue share than the UK: Romania (33.3 per cent); Ireland (33.5 per cent); Slovakia (34.1 per cent); Lithuania (34.8 per cent); Latvia (36.2 per cent); and Spain (37.3 per cent). Just one member will have a bigger deficit than the UK: Ireland, on 15.6 per cent.
EDITOR’S CHOICE
Video: Martin Wolf – ‘Darling flying on a wing and a prayer’ - Apr-22
Economists’ forum - Oct-01
Martin Wolf: On a wing and a prayer - Apr-22
The forecast deterioration in the UK government’s fiscal balance, of 11.1 per cent of GDP between 2007 and 2010, is also the fourth largest in the EU, after Ireland (15.8 per cent), Latvia (13.2 per cent) and Spain (12.0 per cent). How did this fiscal debacle occur? The answer lies far more in spending, forecast to jump by an astounding 8.4 per cent of GDP between 2007 and 2010, than revenue, forecast to shrink by a more modest 2.6 per cent of GDP.
What makes the UK’s rise in government spending as a share of GDP puzzling is that the decline in GDP itself is not exceptional. The Commission forecasts the decline of UK GDP at 3.8 per cent this year, slightly less than for the EU and the eurozone, both of whose economies are expected to shrink by 4 per cent. In 2010, the UK economy is forecast to grow by 0.1 per cent, again slightly better than the EU and the eurozone, both on -0.1 per cent.
The painful conclusion must be that the UK has lost control over public spending. It has to get it back again. Whether they like it or not, UK voters will have to elect a government willing to achieve this end. Government solvency is at stake. The next government will, as a result, find itself in a war of attrition with its own servants. If David Cameron leads the Conservatives to victory, as many expect, he will have to be tougher than Margaret Thatcher, elected prime minister three decades ago.
It is possible, of course, that a powerful recovery will do the trick. In the Budget, the Treasury concluded that the UK had suffered a permanent loss of 5 per cent of GDP as a result of the crisis, while trend growth was 2¾ per cent. The Treasury also assumes the output gap – a measure of excess capacity – will peak at 5 per cent of GDP, then disappear.
It would be highly irresponsible to plan the public finances on the assumption that the economy will soon return to the level and assumed growth of the pre-crisis era. Indeed, I share the view advanced by Robert Chote, director of the Institute for Fiscal Studies, in a recent study, that the UK had an unsustainable boom. A part of the economy was an illusion.
It is possible to propose that, since the British now spend like the French, they should pay taxes like the French. But that would mean a huge increase in taxation – perhaps of as much as 10 per cent of GDP. While some increase in tax rates will be inescapable, to bring the ratio back to where it was before the crisis, the British are not going to accept a vast increase in the tax burden.
Nor is it reasonable to assume that such huge deficits can be run for long without risking big jumps in interest rates. The Treasury forecasts a rise in public sector net debt from 36.5 per cent of GDP in 2007-08 to 76.2 per cent in 2013-14. It is likely to end up higher. A prudent government would not only wish to halt this rise but also to reverse it, to renew the fiscal flexibility it is using up.
Government spending will have to be cut down to size. According to the IFS, the government has pencilled in the tightest spending plans over a seven-year period since April 1985 to March 1992: a 0.1 per cent annual average real increase from 2011-12 to 2013-14, followed by a possible 0.5 per cent annual real increase in current spending for a further four years. This is the least that has to be achieved, given the dire starting position. In effect, government spending may have to be stagnant in real terms for almost two successive parliaments.
That is what happens to a country that has not only spent freely, but now finds itself far poorer than it had hoped. It is clear what this must mean: a sustained freeze on the pay bill; decentralised pay bargaining; employee contributions to public pensions; and a pruning of benefits. It is obvious, too, that this will mean massive and painful conflict between governments and public workers.
Hitherto, the vastly increased levels of government borrowing have concealed the true extent of this crisis. But these deficits will have to be eliminated. The bulk of the action will have to come from control over public spending. The next prime minister is likely to end up quite as hated as Margaret Thatcher was. But, as she liked to say, there is no alternative. The unsustainable cannot endure. If UK policymakers do not take the needed decisions willingly, markets will force them upon them.
martin.wolf@ft.com
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