Bank for International Settlements projections suggest Britain in the worst fiscal position of major developed economies

April 08, 2010 1:42 PM

The TPA's focus in the next couple of weeks is going to be on government borrowing and the national debt, with the launch of our new Debt Clock.  Britain is running one of the highest budget deficits in the developed world, the IMF's projection for this year is that we will come second to Ireland.

Now a new report shows that the long term problem is even more serious.  The Bank for International Settlements has looked at the picture in the longer term and the projections in its new report suggest Britain faces the worst long term fiscal position of any of the countries it has looked at.

First, look at their projections for debt as a percentage of GDP.  There are three lines on these graphs.  The first - in red - is what they expect with present policies.  The second - in green - is with a gradual fiscal adjustment, the BIS have worked on 1% of GDP a year for five years.  The third - in blue - is with that gradual fiscal adjustment and a freeze in age-related spending as a share of GDP, which would be incredibly difficult given an ageing population.

We might be used to thinking of Italy as the land of irresponsible politicians and profligate spending.  The BIS expect that without any policy change their national debt will rise to over 250% of GDP by 2040, but with a fiscal adjustment they can keep debt under 100% of GDP.  Not bad in the circumstances.

Italybisdebtprojection
The projections for Britain paint a much more worrying picture.  Without policy change debt rises towards 550% of GDP in 2040 and even with the kind of fiscal adjustment the Government is planning (but not setting out a credible plan to achieve) debt will be rising towards 400% of GDP.  Even freezing age-related expenditures won't get us off the hook:

Ukbisdebtprojection
The only country projected to run up bigger debts is Japan.  But it gets worse when you look at how affordable those debts will be, which comes down to debt interest payments.  It's just like a mortgage, people don't have their homes repossessed because they owe too much but because they can't make the payments.

Thanks in part to quantitative easing, we've had a relatively easy ride
on that front so far. But this year the Government expect to spend more paying debt interest than they will on public order and safety.  And I wrote yesterday about how that could get much worse quite quickly.  The BIS present estimates of how debt interest costs could increase.  On that score Britain faces the worst position of any country they looked at with debt interest rising in the baseline scenario to an incredible 27% of GDP:

Bisdebtinterestprojections 

Wat Tyler puts that in more tangible numbers, setting out the scenario we'll face if politicians don't get the deficits under control:

"Or to put it another way, by 2040 the average family would be paying (in today's money) over £10 grand every year just to pay the government's debt interest bill."

To do a quick back of the envelope calculation, our GDP is currently nearly £1.5 trillion.  27% of that is just over £400 billion.  There are under 26 million families in Britain, which means the bill will be equivalent to over £15,000 per family today.  And of course you would expect GDP to be a lot higher in 2040 which will inflate those numbers further.

Of course, 2040 is a long way away but all of those problems are expected to grow steadily till then.  And it won't take debt interest payments anywhere near 27% of GDP to push the country way over the brink.  Think you can deal with that deficit through tax rises?  The BIS agree with us that isn't a sensible way forward:

"Taxes distort resource allocation, and can lead to lower levels of growth. Given the level of taxes in some countries, one has to wonder if further increases will actually raise revenue."

Tax rises might increase revenue in the short term by taking more money out of people's pockets, but by undermining growth high taxation and spending will mean less revenue over time.  We need to cut spending and get a grip on the deficit with the kind of strategy set out in How to Cut Public Spending (and Still Win an Election).  If that isn't done, we are heading for a prolonged and devastating economic crisis.

The TPA's focus in the next couple of weeks is going to be on government borrowing and the national debt, with the launch of our new Debt Clock.  Britain is running one of the highest budget deficits in the developed world, the IMF's projection for this year is that we will come second to Ireland.

Now a new report shows that the long term problem is even more serious.  The Bank for International Settlements has looked at the picture in the longer term and the projections in its new report suggest Britain faces the worst long term fiscal position of any of the countries it has looked at.

First, look at their projections for debt as a percentage of GDP.  There are three lines on these graphs.  The first - in red - is what they expect with present policies.  The second - in green - is with a gradual fiscal adjustment, the BIS have worked on 1% of GDP a year for five years.  The third - in blue - is with that gradual fiscal adjustment and a freeze in age-related spending as a share of GDP, which would be incredibly difficult given an ageing population.

We might be used to thinking of Italy as the land of irresponsible politicians and profligate spending.  The BIS expect that without any policy change their national debt will rise to over 250% of GDP by 2040, but with a fiscal adjustment they can keep debt under 100% of GDP.  Not bad in the circumstances.

Italybisdebtprojection
The projections for Britain paint a much more worrying picture.  Without policy change debt rises towards 550% of GDP in 2040 and even with the kind of fiscal adjustment the Government is planning (but not setting out a credible plan to achieve) debt will be rising towards 400% of GDP.  Even freezing age-related expenditures won't get us off the hook:

Ukbisdebtprojection
The only country projected to run up bigger debts is Japan.  But it gets worse when you look at how affordable those debts will be, which comes down to debt interest payments.  It's just like a mortgage, people don't have their homes repossessed because they owe too much but because they can't make the payments.

Thanks in part to quantitative easing, we've had a relatively easy ride
on that front so far. But this year the Government expect to spend more paying debt interest than they will on public order and safety.  And I wrote yesterday about how that could get much worse quite quickly.  The BIS present estimates of how debt interest costs could increase.  On that score Britain faces the worst position of any country they looked at with debt interest rising in the baseline scenario to an incredible 27% of GDP:

Bisdebtinterestprojections 

Wat Tyler puts that in more tangible numbers, setting out the scenario we'll face if politicians don't get the deficits under control:

"Or to put it another way, by 2040 the average family would be paying (in today's money) over £10 grand every year just to pay the government's debt interest bill."

To do a quick back of the envelope calculation, our GDP is currently nearly £1.5 trillion.  27% of that is just over £400 billion.  There are under 26 million families in Britain, which means the bill will be equivalent to over £15,000 per family today.  And of course you would expect GDP to be a lot higher in 2040 which will inflate those numbers further.

Of course, 2040 is a long way away but all of those problems are expected to grow steadily till then.  And it won't take debt interest payments anywhere near 27% of GDP to push the country way over the brink.  Think you can deal with that deficit through tax rises?  The BIS agree with us that isn't a sensible way forward:

"Taxes distort resource allocation, and can lead to lower levels of growth. Given the level of taxes in some countries, one has to wonder if further increases will actually raise revenue."

Tax rises might increase revenue in the short term by taking more money out of people's pockets, but by undermining growth high taxation and spending will mean less revenue over time.  We need to cut spending and get a grip on the deficit with the kind of strategy set out in How to Cut Public Spending (and Still Win an Election).  If that isn't done, we are heading for a prolonged and devastating economic crisis.

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