Seven lost years for England

UK Chancellor George Osborne has delivered an update on the budget and economy that confirms the UK as one of the weakest economies in the world, with seven lost years of economic growth.

The level of GDP will not return to the 2007 pre-crisis level until 2014, the budget deficit remains the one of the highest in the OECD, the peak level of government debt keeps being revised higher and the year at which it is projected to stabilise has again been pushed back, this time to 2016-17. It is a cocktail that will have the credit rating agencies circling like vultures, poised to cut the UK’s triple-A rating.

Osborne is forecasting UK GDP to contract 0.1 per cent in 2012, a sharp downward revision from the 0.8 per cent growth rate forecast in the March budget. The GDP projections have also been cut, with the government forecasting GDP growth of just 1.2 per cent in 2013 (revised down from 2 per cent) and 2 per cent in 2014. Recall that GDP fell 1.1 per cent in 2008, and fell a further 4.4 per cent in 2009, before edging up 2.1 per cent in 2010 and falling 0.7 per cent in 2011.

So poorly has the UK economy performed, that government borrowing is forecast to be a whopping 7.7 per cent of GDP in 2013 and 6.9 per cent of GDP in 2014, levels that continue to drive up the debt to GDP ratios. These horrible budget figures take account of the budget severity measures delivered over the past two years.

According to Osborne, net government debt will hit 79.9 per cent of GDP in 2016-17, which is almost 10 per cent of GDP higher than the peak projected two years ago when the then new Conservative-Liberal Democrat coalition government delivered its first budget. Osborne noted that "the tougher economic conditions mean that while our deficit is forecast to go on falling, instead of taking three years to get our debt falling, it's going to take four."

The debt level is being held lower by around £3.5 billion pounds from the government’s decision to sell licences to run the 4G mobile phone services.

Credit rating agency Fitch sounded a warning that the outlook for government debt was such that it was approaching "the upper limit that was consistent with the UK maintaining a triple-A rating” but that it will conduct a formal review of the rating after the 2013 budget. It would take a remarkable turn of events for the UK not to be downgraded.

The remarkable thing about the poor performance of the UK is that the debasement of its currency, via a 25 per cent depreciation and unprecedented quantitative easing from the Bank of England, has lessened the extent of the downturn. The export sector and super stimulatory monetary policy has prevented the UK from falling into an even deeper recession. Recall that for the likes of Greece and Spain, policy makers do not have the luxury of a flexible exchange rate or a self-managed central bank to print money as required.

The UK is now the eighth largest economy in the world and, despite the global market debacle of the past five years, remains a critical hub for global financial markets. As banking and finance undergoes its transformation, this source of support for the UK economy will continue to fade. In recent years, the UK has slipped behind Russia and Brazil in terms of its ranking in world GDP and within a decade or so, it likely to slip out of the top ten.

In per capita GDP terms, which is the more relevant measure for assessing living standards of the general population, the UK has slipped to number 22 and is only a small margin ahead of the likes of Spain, Cyprus, South Korea and New Zealand.

There are few reasons to be optimistic about the long-term future for the UK. Its economic plight saw it conscript Bank of Canada Governor and former Goldman Sachs staffer Mark Carney to the role of Governor of the Bank of England. It is not clear whether this reflects the quality of other internal candidates for the role or government desperation to recruit someone free of the policy baggage that has acted as a handbrake on progressive policy settings. Whatever the case, Carney has a massive challenge ahead to try to return the UK economy to any semblance of prosperity.

It might be harsh, but the UK is slowly running down the spoils of its plunder and exploitation of the colonies that kept it strong for so long. It has little industry to fall back on, it has been poorly managed for decades and its reliance on banking and seemingly on house price rises proved in fact to be a house of cards.

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The irony is that the current conservative government was elected on the basis of reducing government spending on the basis of a reduced deficit (Seven lost years for England, December 6). They promised that by following this path the economy would improve (Seven lost years for England, December 6).
It proves the folly of not sticking to Keynesian principles in full by having the opposing effect of a contractionary fiscal policy working in tandem with a expansionary monetary policy. You need both policies heading in the same direction.
Sadly, in this country we're doing the same thing but we're at a different stage of the economic cycle. Hopefully after the next election who ever is in control can go back to an expansionary fiscal policy and forget about running the economy on political imperatives.
Dear Stephen, is it not coincidental that the UK is also a financial basket case after years of Labour Party governance, with the conservatives trying to now clean up the mess (Seven lost years for England, December 6). Much the same as here in Oz. eg NSW, QLD, and next year the Feds. I am constantly reminded of the old saying "Labour is great until they run out of spending other peoples' money". I suppose at least here in Oz we will be able to give them the boot before they totally screw up the place; imagine if we had 5 year terms and had to suffer them for another 3 years - heaven forbid !
The amounts transferred to the European Union annually dwarf all the economy measures that the Conservatives have so far enacted (Seven lost years for England, December 6).
If the UK's ever more likley In/Out Referendum on EU membership gets up, I expect that following an out vote, the amount of money available once the UK stps propping up the Euro-bureacracy will make a measurable improvement to the UK's bottom line, for little real loss.
For Jim:
People who have actually read Keynes know that he would be horrified that any country would consider deficit spending when it had a debt to GDP figure of 79% (Seven lost years for England, December 6).
I agree there are some encouraging patches for the UK economy unfortunately they get overshadowed by the magnitude of the legacy from Labour’s 13 years of imprudent actions, which by 2010 had knocked the competitive stuffing out of the country (Seven lost years for England, December 6). At least we in Australia can learn from the UK’s experience that throwing more and more money at Government services doesn’t necessarily improve outcomes, without major change it just makes things worse. Regulating and taxing the hell out of the productive bits of the economy in the process of paying for it all does not create new competitive businesses and new well paying jobs either; and neither does giving old transnational businesses some ‘don’t go away money’. Consequently its not the running down of its colonies that caused all this, it was the flawed idea that they needed more of an overbearingly big, centralised nanny state, with imprudent politicians who could continue to aggravate things through their own unwillingness to vigilantly govern and transform a wasteful and ineffective public sector. Subsequently, what the UK and Europe is teaching voters in Australia is that we should not judge our own politicians by the good intentions of their promises, which they break with impunity anyway, “there will be no price on carbon” … etc. etc. But rather we should judge them by the actual results of their policies; like a big new national debt, high exchange rates, 4 years of rising power bills and mining investment in decline because of high input costs. So the lesson we should take from the UK’s experience is the solutions of the “progressive” thinking left don’t work, in fact they’ve never worked, even when someone new and with the best of all intentions implements them; so perhaps its time we went back to the idea of small, decentralised government and some freer market capitalism. But I for one won’t be holding my breath.