"The NHS will last as long as there are folk left with the faith to fight for it"
Aneurin Bevan

Saturday, 29 May 2010

Crisis, what crisis?

OK, so I am not an economist, but having lived through the Thatcher and Major recessions, I know how bad a recession can be. Labour's support of the economy made sure that we did not suffer a recession as bad as the last two Tory-created recessions.

But are we really in such a mess as the arch-spinner Cameron claims we are? No. Here are some facts.

First, lets have a look at the figures from the IMF. Figure 4, page 13, of the Fiscal Monitor shows the debt as a percentage of GDP for several major economies. The first, here, is for the UK.

Remember, these are figures from the IMF, so they are reliable. The first thing to note is that while there are some variations the level of GDP is pretty flat between 1975 and 2007. The peak at 1995/6 is a Tory recession (in general, when you have a recession, the debt rises). The next thing to note is that Gordon Brown, as chancellor, paid down the debt so that there is a dip at 2003. The debt rises a little and tails off at 2007 at a level equivalent to the late 80s (remember, the 80s was a time when the country was awash with North Sea oil revenues - which should have been a time of plenty). The third point is that the debt rises from 2008 and is expected to peak in 2011. The final point is that this final level of debt is equivalent to the level in the mid-60s when the country was expanding higher education, the road system and rebuilding our city centres - not a time of austerity. The fact is, we should not regard our debt levels to be catastrophic, and certainly we should not be demanding austerity measures.

Now have a look at the debt of other countries. In the following graph I have copied all the other graphs from the Fiscal Monitor report, rescaled them and overlaid them.

The graph shows Japan, US, UK, Germany and Canada; as well as the G-7 average. Japan is clearly an aberration, but I have shown it here as an illustration that a country that has a high standard of living and is an economic success can still sustain a high level of debt. The main point of this graph is to show that the UK is not exceptional in its level of debt. The G-7 average and the US levels of debt are higher than the UK. Germany's debt 2010-2015 is only just behind the UK and with the problems in the Eurozone these figures are likely to be underestimates.

Far more interesting is that for the period 1990 - 2007 the UK debt was consistently lower than any of the other countries shown here, that is, the years when Brown and Darling were in charge of the Treasury, the UK's level of debt was less than our competitors. Where has Cameron ever acknowledged this sucess of the Labour administration? Since the peak after 2008 was due to the global recession, the likelihood is that the UK could return back to a low level compared to the G-7.

This is a view supported by Samuel Brittan, a monetarist economist and a supporter of the Conservatives. In the Financial Times he writes:

"What I doubt, however, is the conventional view that there is a specifically UK fiscal crisis. The nearest thing to an impartial audit comes from the new IMF Fiscal Monitor. This shows governments’ “gross financing needs” for the UK in 2010 equivalent to 20 per cent of gross domestic product. Some 11.4 per cent comes from the Budget deficit and 8.6 per cent from maturing debt. You can make the debating point that total financing needs are not far below those of Greece. But they are well below those of France, at 25.1 per cent of GDP, let alone the US (32.2 per cent) or Japan (64 per cent)." 

Let's have a look at these "financial needs", these are from Table 6 (page 21) of the Fiscal Monitor (14 May 2010) report from the IMF:

Debt (2009)
Maturity (years)

Or take the gross debt-to-GDP ratio. The UK, at 68.2 per cent, emerges not merely below the US but below many other countries including Germany and Canada. Where the UK emerges with flying colours is in the average maturity of the debt, which of course determines future financing needs. This turns out at 12.8 years, while nearly every other country listed has a maturity in low single figures, such as 4.4 years for the US. The IMF analysts believe that the bulk of fiscal deterioration in most advanced countries comes neither from irresponsible spending nor fiscal stimuli, but from the automatic effects of the recession." 

Brittan clearly thinks that the UK is in a very good position compared to other leading economies. This is not a sentiment publicised by Cameron, but we know that Cameron hardly ever speaks the truth.

So, who owns this debt? Analysis from Lloyds TSB says that basically we do. Table a, page 2, gives the following figures:

Q3 09% Total
Insurance co's and pension funds248.432.4
Other financial institutions97.112.7
Building societies12.91.7
Local authorities & public corporations1.50.2
Banks (excl BoE)33.14.3
Bank of England151.819.8

The interesting point is that just 28% is owned by overseas investors. 19.8% is owned by the Bank of England (presumably through quantative easing) so that means that 51.9% is owned by us. So when the government complains about the amount of money that is spent in servicing the debt, remember that just 28% of the interest payment goes out of the country and the rest comes back to us.

The ludicrous argument of Osborne is that the interest payments are a problem, whereas in fact this is the kind of tax redistribution that he approves of: more money into pension funds at a time when the government is desperate for us to save more for our pensions, more money to reward savings when the government wants us to save more.

Isn't it about time that Cameron and Osborne started telling the truth about the economy?

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