In These New Times

A new paradigm for a post-imperial world

Shock as British deficit equals that of Greece

Posted by seumasach on February 21, 2010

Despite Britain’s wholehearted commitment to destroying the Euro the pound is once again falling against that currency. To compare Britain’s financial situation to that of Greece is flattering: Goldman Sach’s machinations in Greece notwithstanding, Britain is second to none in the art of off the books accounting. We are running major wars out of a secret contingency fund, printing money to shore up our banks as off the books emergency funds and deferring  costs on infrastructural projects of dubious quality and great expense run for the benefit of friends of New Labour. No one knows the true state of our finances: we know only that they are unimaginably bad. To add to our woes we are outside the Eurozone and face an Iceland style collapse, including debts owed in foreign currencies which we can never conceivably cover. Unlike Greece we have no political will to remedy the situation unless you consider a war against our creditors to be such a remedy.

Sean O’Grady

Independent

19th February, 2010

Britain’s public finances are in a worse position than those of Greece, according to the latest figures on government borrowing. The Office for National Statistics said yesterday that January alone saw a net shortfall of £4.3bn, far worse than City forecasts and in a month which has always previously shown a healthy surplus. It puts the UK on track for a deficit of £180bn this year, or 12.8 per cent of GDP, economists said, shading the Greek figure, hitherto the worst in the European Union, of 12.7 per cent. In the pre-Budget report the Chancellor forecast a deficit of £178bn for the current year. Warnings that the UK could face a Greek-style crisis of confidence have been building for some weeks, and yesterday saw a sell-off of sterling and British government securities, or gilts, on the disappointing news.

Jonathan Loynes, chief European economist at Capital Economics commented: “The figures suggest that this year’s budget deficit could exceed that of Greece and further underline the need for more decisive action to improve the fiscal position when the economy is strong enough to withstand it.

“It is clear that a more credible plan to restore the public finances to health will be required shortly after the general election in order to keep the markets and rating agencies at bay.”

January usually shows a healthy surplus, as tax receipts flow in from City bonuses and payments made before the final deadline for self-assessment on 31 January. Last year, for example, revenues exceeded public spending by over £5bn in the month. This year, tax receipts across the board were unusually depressed, reflecting the depth of the recession in the 2008-09 tax year. Depressed earnings in the financial sector and the general weakness of the economy conspired to push receipts down by 9 per cent overall compared with last year; income tax takings slumped by 20 per cent, and corporation gains tax revenues fell by 6 per cent. VAT payments were up a little, after the 17.5 per cent rate was restored on 1 January. On the other side of the ledger, public spending is still showing double digit increases: 15 per cent up in January, driven higher by the rise in benefits to the unemployed.

However, economists also pointed out that the total national debt carried by Britain is still lower than Greece and other so-called PIIGS – Portugal, Italy, Ireland, Greece and Spain, the eurozone’s most heavily indebted nations. Although it has been expanding rapidly, UK national debt stands at about 60 per cent of GDP, against more than 100 per cent in most of these other states.

British debt is also much longer term than that of Greece, making re-financing the debt easier. November and December showed relatively good returns, but even so, all economists stressed the need for clarity on how the government will deal with the issue, whoever wins the next election. The Conservative leader, David Cameron, has explicitly likened the UK to Greece and warned that failure to deal with the deficit issue could mean higher interest rates and mortgage bills hundreds of pounds a month larger for millions of householders.

Shadow Chief Secretary to the Treasury, Phillip Hammond, said yesterday: “These appalling figures – showing the first January deficit on record – illustrate the scale of Labour’s debt crisis. Every British family faces a bill of £4,800 to pay for Gordon Brown’s borrowing so far this financial year alone.”

Liberal Democrat Treasury spokesman Vincent Cable added that the figures “underline the importance of having a credible plan to tackle the deficit. Simply slashing spending now regardless of the economic circumstances is not only a fruitless labour but a damaging one”.

The Treasury say they are sticking to the Chancellor’s forecasts. Mr Darling has promised to cut the underlying budget deficit by a half within four years. Pressure on the finances of local government is also set to continue to intensify, as support from Whitehall is squeezed and local economies are hit by the continuing effects of the downturn. One of the areas hardest hit by the recession is the Midlands. Last week Birmingham City Council, the largest local authority in the country, announced 2,000 redundancies and Nottingham £18m in savings, examples of a growing tide of public-sector cuts and job losses.

£180bn

Scale of UK deficit this year, up from forecast £178bn.

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