Benefit Of The Doubt

22/07/2011 at 10:32 am 1 comment

Government debt is an issue that has been preoccupying minds in Europe and the US for some time now. Emergency debates, emergency summits, emergency measures and the prospect of default ever hanging in the air: the sense is of a serious and immediately pressing problem which requires committed action to resolve.

In Britain there is none of this sense of urgency. Indeed, some commentators have been positively revelling in the woes of the eurozone; it has become idiomatic in certain quarters that we wise British are to be congratulated on our decision to remain outside the single European currency, membership of which has caused such terrible difficulties for those callow Continental powers foolish enough to have joined.

There is only one problem: the UK has a debt problem which is every bit as serious as those of the eurozone and the US.

Data out yesterday on the public finances showed that government borrowing reached £14bn last month, £1.5bn above the median estimate and £0.3bn higher than in June last year. For the period April-June – the first quarter of the 2011-12 fiscal year – borrowing is roughly unchanged over the same quarter the previous year, having fallen by less than 1%.

As the OBR’s accompanying commentary on the data reveals, a fall of over 14% on last year’s deficit is required to meet the Chancellor’s goal of borrowing “only” £122bn this year (7.9% of GDP). After the disappointing performance of the last three months this entails a reduction of almost 20% over the rest of the period.

The OBR insists that this is perfectly manageable, but there is a major concern. The disappointment came from weak revenues (spending was roughly in line with expectations), and this despite an increase in VAT receipts of over 16%, reflecting the higher rate that kicked in at the start of the year.  Income tax, NI and corporation tax all disappointed. And that reflects weak economic growth.

The government’s 7.9% deficit target relied on a March growth assumption of 1.7% for 2011, which looks toppy against more recent forecasts. Failure to meet the target – which represents a modest deficit reduction of under 2% of GDP in any case – would cast into doubt the UK’s ability to contain its burgeoning public debt.

In his Budget statement, Mr Osborne had the following to say:

We have a higher deficit than Portugal, Greece and Spain, but we have virtually the same interest rates as Germany.

In other words, Britain’s creditworthiness has been receiving the benefit of the doubt from the bond markets. If it emerges that our fiscal consolidation plans have gone agley, that may cease to be the case. Our credit ratings and our low bond yields could be jeopardised – and that could mean trouble.

Just ask the Europeans.

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1 Comment

  • 1. Home Truths « The Blog @ Vigilant Financial  |  18/11/2011 at 3:42 pm

    […] slower than anticipated growth in this country will be the impact on our debt arithmetic. This was already looking rocky over the summer. Although the numbers have improved since and we are currently in line with this year’s […]

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