Muddling Through …

24/08/2012 at 11:37 am 2 comments

The UK economy is hardly unique in that it currently faces difficulties. Nor is it unique in enjoying “safe haven” status. While this status is not guaranteed, it is to be hoped that it will last until confidence returns. Unfortunately, this week’s release of government borrowing data for July has drawn increased attention to the country’s weak debt position – something with which readers of this blog will be familiar, but which has tended to be ignored or dismissed by most observers who have chosen to believe that the UK is undergoing an “austere” level of fiscal consolidation.

In the words of the report issued by the Office for Budget Responsibility:

Excluding the impact of moving the Royal Mail’s historic pension fund deficit and associated assets into the public sector, the March Economic and fiscal outlook (EFO) forecast a £5.1 billion improvement in PSNB in 2012-13 compared to 2011-12. But after the first four months of the financial year, PSNB (excluding Royal Mail) is £9.3 billion higher than last year.

The figures at the back of the OBR report show that this increase puts UK borrowing 26% over where it was for April-July last year, and that borrowing now needs to fall by 16% for the government to hit its (undemanding) target for reducing the 2012-13 budget deficit to £119.9bn from £125bn the previous year.

Still, we must not be too gloomy. As the OBR notes, monthly data on fiscal receipts and outlays are volatile and subject to revision. And only a month ago, S&P affirmed the UK’s AAA credit rating and stable outlook, while observing that they thought the OBR’s estimates for growth and government debt over the short term were too optimistic. (Their full report can be summarised as: “despite its weak growth and large debt burden, Britain isn’t in the euro and that’s good enough for us.”)

Like all governments, our own has made mistakes. The use of indirect taxes to help bolster receipts ramped up inflation, which squeezed wage growth and pushed the household sector into recession. And just as this effect has begun to recede, our strengthening currency has seen real exports fall for two consecutive quarters (sterling has risen some 11% against the euro over the last twelve months). But if there are no shocks, the economy should manage to muddle through the current period of stagnation. Growth should return, employment continue to grow – and debt reduction targets will have a much better chance of being hit.

All the recent borrowing numbers really do, then, is remind us that the UK has never been a safe haven from the sovereign crisis on the basis of its own debt fundamentals. If anyone begins to think that this matters – one of S&P’s competitor “agencies”, for instance – it could still spell trouble. Otherwise, Britain ought to get away with it.

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  • 1. Cliff Edge « The Blog @ Vigilant Financial  |  09/11/2012 at 5:00 pm

    […] initial expectations and higher than the 4.0% increase in nominal GDP over the same period). We observed recently that Britain’s status as a safe haven was questionable on fundamental grounds but should […]

  • […] growth has disappointed, borrowing targets have been missed and the plan remains to hope we can muddle through the rough patch with modest aspirations towards balancing the books over the medium term. Numbers wise, real GDP […]

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