Global Economic Crisis

The Conservative/Liberal Coalition now running the government in the United Kingdom began its administration with a flurry of draconian spending cuts. Under the leadership of Prime Minister David Cameron and its chancellor of the exchequer George Osborne, this imposed austerity has been unleashed under the threat of a looming sovereign debt crisis. Social spending is being radically reduced, and the armed forces, especially the Royal Navy, are being virtually disarmed. The question therefore must be posed; will these austerity measures succeed in their stated purpose, which is removing the danger of a sovereign debt catastrophe in the UK?

There are disturbing indications beginning to accumulate that point to the steps being undertaken by Cameron and Osborne as being too late and insufficient. The UK’s Office for National Statistics has just released public spending figures for November, and they show that net public borrowing requirements increased to a record  £22.770 billion. This staggering level of deficit spending seems to show that the UK is now in a public debt trap. Even though unlike the U.S. most of its public debt is long-term, the British government has accumulated a national debt so large that even small increases in bond yields will add significantly to the need for more public borrowing, making it unlikely that even Osborne’s austerity budget will have much impact. Furthermore, these same austerity measures risk a double-dip recession in the UK, further depressing government income. All these trends point to an elevated danger of a sovereign debt implosion confronting the United Kingdom, in a timeframe that may be much sooner than many analysts would anticipate.

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As expected, George Osborne, Chancellor of the Exchequer in the new British coalition government, unveiled an emergency budget aimed at tacking the UK’s massive structural fiscal deficit. It is being described as the toughest UK budget since the age of austerity that followed in the immediate postwar period after the Second World War. It features a rise in the VAT to 20%, increased income and capital gains taxes, public service wage freezes and across the board programmatic budget cuts. The question that stands is this: will it work?

In my view, as explained in my book (Global Economic Forecast 2010-2015: Recession Into Depression) the United Kingdom, as with many other advanced economies, is in a fiscal and demographic trap. It’s national debt has skyrocketed to almost 70% of GDP; even with the Osborne budget cuts, continuing deficits will send this ratio towards 100% of GDP in the near future. With an aging population, meagre real economic growth at best and an economy that, like a heroin addict, has become dependent on its fiscal deficit fix, the UK economy is in such a trap.

Cut public spending dramatically, warn the critics, and the British economy will enter a double dip recession, and they are right. A renewed economic contraction will diminish tax revenue, largely defeating the purpose  of budget cuts and increased levels of taxation. However, continuing the neo-Keynesian debt folly is even more calamitous, for it will inevitably lead to a total fiscal collapse of the UK.

The real lesson is that the wild spending spree engaged in by policymakers in response to the global economic and financial crisis was flawed, and should have been curtailed before public debt to GDP ratios exploded to unsustainable levels. It is now too late to avoid severe economic pain. The only option left is determining which path will incur the least suffering on society.

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