But is the UK government really so powerless?

In the US, $160bn is winging its way to households, and George Dubya said the government “recognised the signs early and took action.”     Even so, many fear the action taken could be too late.

If, on the other hand, you believe the UK is running around 12–24 months behind the US, the right time for a similar tax credit in the UK is probably now – or maybe a few months’ time when the election is a little closer.

But, as we all know, the UK government can’t afford similar measures.

At the end of last year, the US had a budget deficit of 1.2 per cent of GDP (Gross Domestic Product).   The UK’s deficit, on the other hand, was 3.1 per cent of GDP.   Germany’s deficit had fallen to a mere 0.3 per cent of GDP; even the deficit in France, at 2.4 per cent, was lower than in the UK.

Britain has blown it.  We could be seeing the imminent end of the longest ever run of economic growth – and we haven’t put anything aside. 

Well, yes that’s true up to a point, but it isn’t the full story.

First off, arguably, government borrowing is one of the reasons why we haven’t had negative quarterly growth for such a long time.  Earlier this decade, when the US and Germany both hit recession, the British economy merely slowed.  Why?  It seems there were two main reasons.  Firstly, after a certain amount of creaking, and after blowing away the cobwebs, Gordon Brown opened up the vaults, and spent.  

Just remember that.  You may say the government should have saved when the times were good – but the times were good, in part, because the government wasn’t saving.

Perhaps the other reason why the UK continued to grow was down to the housing boom.   Although experts insist rising house prices do not lead to rising consumption –  we just don’t agree.   

In the UK, house prices have taken on a significance in the British psyche that is not seen anywhere else in the world.    Interest rates did not fall nearly so low in the UK as they did in the US and Eurozone earlier this decade, but we still experienced one of the highest rates of house price inflation in the world – and much higher than in the US.  

Economists say the data does not suggest higher house prices led to higher consumer spending – and say the fact that the two rose in unison was because they were both pushed up by the same factors.

But this reasoning seems to fly in the face of common sense.  When house prices go up, we feel good; we are more likely to buy Bollie instead of Cava, and we tend to worry less about our pension.

So, there are worrying implications in all this. If the UK grew because the government was spending too much, and because house prices were rising, then what will happen when those two factors no longer work?  In other words, how can we get out jail?

Economists tend to argue that the big hope for the UK lies with the falling pound, and exporting our way out of trouble.

But it seems there is another point that gets overlooked.

In fact, of our main economic rivals – that’s the US, Japan, France, Germany and Italy, the UK’s government has the lowest level of net debt.

The latest statistics say the UK’s public sector net debt is 36.7 per cent of GDP.  Contrast this with the US, where net debt is over 60 per cent of GDP,  or Germany – 64.5 per cent of GDP.

The truth is that the UK’s total level of debt is not as bad as is commonly believed – it is just that in the UK it is getting worse, while in most of the countries mentioned above, it is getting better. 

According to a report published a month or so ago by CEBR, public expenditure as a share of GDP in the UK has risen from 39.0 per cent of GDP in 2001/02 to an estimated 43.0 per cent  in 2007/08.    Meanwhile, in other countries, public spending to GDP has been falling.  For example, in 2007 Germany’s public spending as a percentage of GDP was lower than in the UK for the first time since 1974.

Then again, in East Anglia, London and the South-East, public spending as a percentage of GDP is less than 40 per cent.    In the South-East the ratio is just 34.1 per cent.    By contrast, the North-East, Wales, North-West, and Scotland all enjoy public spending that is more than 50 per cent of local GDP.
So it seems that the UK has modest public sector debt, but high public spending in some regions.  What the UK needs to do is build upon the fact it has low net debt to fix the structural discrepancy.

The UK’s Treasury can still bail out the UK, just like is happening in the US.  The problem is not that the UK can’t afford to borrow more, rather it is that she hasn’t been spending wisely.   It is that which needs to be fixed.

 net debt

© Investment & Business News 2013