Yesterday, the European Central Bank’s boss spoke out against government spending. He said European governments are at their borrowing limit.
Meanwhile, as the UK’s latest borrowing figures reveal a horror story that would have left Dracula cowering, the latest borrowing figures from France were out this morning and, while not quite so bad, it seems Freddie Krueger and Co. will have to settle for being a long way down the list of horrors for the time being.
Jean-Claude Trichet is a bit old-fashioned about government spending. He seems to think it is something that should be kept under control.
“There is a moment where you can’t spend any more and you can’t accumulate any more debt,” he said yesterday. “I think we are at that moment.”
He added: “As far as risk, risk premiums on money markets, the functioning of the money markets is concerned, we have returned to a situation I would qualify as ‘pre-Lehmans’.”
So for risk taking we are at the kind of level we were at before Lehmans went down – which was too low by the way, just not awful. But alas, government borrowing is on the up.
The latest figures out from the Office for National Statistics last week told a story to keep you awake at night. May’s public borrowing came in at £19.9bn. It seems the UK is on course to see borrowing of around £200bn, or 14 per cent of GDP this year.
According to the Institute of Fiscal Studies, public sector receipts were 10.8 per cent down on the same month last year, while central government spending was 7.4 per cent up.
Together, public sector net investment during April and May 2008 has been £4.0bn, which is 46 per cent higher than in the same two months of 2008. The Budget predicted that net investment in 2009–10 would be £43.8bn, which is 21.0 per cent above last year’s level. Even more worrying, government borrowing has increased more sharply over the past two months than the Budget predicted for the financial year as a whole.
But whether you are a fan of fiscal stimuli or not, the truth is that today’s fiscal policies are not the problem. The real problem relates to the policies before the crisis. Government spending and borrowing were far too high at the high point of the economic cycle. To correct this during a recession will be incredibly painful.
Meanwhile, in France, the country’s Budget Minister Eric Woerth has said that its budget deficit may widen to between 7 and 7.5 per cent of GDP this year – with total borrowing expected to come in at around 115 billion euros. Okay, that seems like little more than a picnic in comparison to the UK’s deficit, but even so, it still remains enormous.
The French government has so far earmarked around 30 billion euros worth of stimulus measures.
So is all this debt affordable?
It is difficult to see how we can avoid seeing significant increases in tax rates over the next few years.
But even then, the key may well lie in the future course of interest rates.
Last week this column told the story of the fall and rise in the typical UK family’s discretionary disposable income. According to Ernst and Young, 2008 has seen big improvements as both mortgage and energy costs have fallen.
But it seems this affordability will be squeezed over the next few years as taxes rise to pay for today’s borrowing.
Even so, there is another consideration that may be more important even than the size of government debt – and that is the interest rate the government has to pay on its debt.
In the next article we take a look at how our discretionary disposable income is likely to be hit over the next few years.
© Investment & Business News 2013