In These New Times

Why Britain is a raging ‘sell’

By Associate Editor David Stevenson Dec 19, 2008
moneyweek

Dark times ahead for Britain
Help!

Britain’s running out of money. Yesterday’s government borrowing figures – the worst in at least 15 years – were truly shocking. Already the forecasts that Chancellor Alistair Darling made last month in the pre-Budget report are looking well short.

And the national debt can only get worse, whatever Gordon Brown’s telling us. Sadly, for savers, most things about Britain are looking more and more like a ‘sell’…

Tax revenues are vanishing fast
Before 1993, it appears that Britain’s national archiving wasn’t over-diligent. There’s no record of exactly how much public sector net borrowing (PSNB) our governments racked up in the 1970s and 1980s. But yesterday’s November PSNB figure was still the nastiest for the last 15 years. And not only was it much worse than the experts expected, the total for the first eight months of the year has now hit an eye-watering £56.1bn.

That’s almost double last year’s level, and doesn’t even take into account the £20bn fiscal stimulus package announced in the pre-Budget report last month – the VAT cut, which will cost an estimated £12.4bn, wasn’t introduced until December.

Worse, the public coffers are emptying by the minute.

Stamp duty receipts, which boomed last year, are collapsing as the housing market implodes. And it’ll just get worse in 2009. The Council for Mortgage Lenders reckons that net lending next year will actually shrink by £25bn, with half a million home loan borrowers likely to fall behind on their payments.

Further, with most businesses making a lot less money than they used to, tax receipts are really suffering. More and more lay-offs mean fewer national insurance contributions from both employers and employees. And there’s another side to that particular coin – higher jobless claims. November’s unemployment figures out this week showed another 75,000 added to the benefits queue.

And everyday, it seems, someone else is bleating for a bailout.

Borrowing is set to rise further

Mr Darling finally admitted in the Pre-Budget Report (PBR) that his original borrowing forecast of £43bn for the fiscal year to March 2009 was rubbish. So he upped his estimate by over 80% to £78bn, and pencilled in £118bn for 2009/10.

But what’s truly frightening is how fast those figures have gone past their sell-by date. “The public finances are dire, with Darling inheriting a mess from Gordon Brown”, says Hetal Mehta at the Ernst & Young Item Club. “While alarmingly high, the government deficit projections contained in November’s PBR are already looking too low”, says Global Insight’s Howard Archer.

Vicky Redwood at Capital Economics is even more concerned. Not only were November’s public finance figures “worryingly bad, given that they’re only just starting to reflect the impact of the recession”, she says, but “the outlook further ahead is far worse than the Chancellor recognized”. She’s now forecasting borrowing to rise “to around £150bn per annum over the next few years”.

£150bn! For several years! Now that’s really scary – it’s well over 10% of our entire annual output.

That rate of borrowing just can’t continue. Why not? For one thing, there’s the horrendous cost of debt interest. The Treasury simply won’t be able to keep on flogging endless amounts of gilts at today’s bargain basement 3% rate. But more importantly, sums of that size will have to come from abroad. And no investor outside the UK in his right mind will be keen to support our government right now.

Why should they lend in sterling, only to get hammered on the exchange rate? The pound dropped by more than 3% yesterday against the dollar and has plummeted by an extraordinary 10% against the euro, almost to parity, within the last two weeks. The worse the economic news, and the more the government’s bills stack up, the more the currency depreciates.

It’s a vicious, unrelenting, downward spiral – the worst since the Ramsay MacDonald devaluation in 1931, when the UK was forced to abandon the gold standard.

Printing more pounds will just make matters worse

Is there any way out?

Well, we’ve seen this week how the wind’s blowing across the Atlantic. The Federal Reserve has cut official interest rates pretty much to zero, and is also “quantitatively easing” – i.e. printing money – like crazy (see yesterday’s Money Morning for more: 0% interest rates are dangerous. Here’s why). Japan’s just cut its key rate from 0.3% to 0.1%.

Plenty of siren voices are urging Mervyn King and his mates on the Bank of England’s Monetary Policy committee to do likewise, and they probably will. The trouble is that such a response will just make matters worse for sterling. Printing more pounds means more supply – which will push the exchange rate down yet further.

Savers in Britain are already suffering horribly. Their stocks have been smashed, their bank interest is being slashed, and they can’t even afford to go abroad to get away from it all. But now investors from outside the country are being severely punished, too. When they finally pull the plug, we really are sunk.

The only way out of this mess is for Messrs Brown and Darling to stop pretending to themselves they’re saving the planet and come up with hard-nosed plans to get the budget more balanced, before they’re forced to phone the IMF for a bailout themselves.

But they’re not going to do that, are they?