Friday, November 28, 2008

Chasing After The French Model

Strewth! She's even pawned her vest!

Something we've heard a lot recently is that borrowing half a trillion quid won't be a problem because it will only bring us into line with La Belle France.

Brown repeated it in this week's PMQs, and yesterday, Labour's Anatole Kaletsky wrote:

"Hysterical claims that Britain is on the brink of “national bankruptcy”, or that the Government has “run out of money” or that the pound is going the way of the Icelandic krona... are absurd. Britain's public debt-to-GDP ratio, at around 40 per cent, is the lowest among the G7 advanced economies and if it were to rise to 57 per cent, as suggested by Treasury projections, this would not present a serious problem. Nor would it drive up interest rates and inflation, to judge by the experience of Japan, Italy, France and Germany, all of which have public debt ratios above 57 per cent."

Of course, Kaletsky fails to mention that these oft quoted international debt comparisons are shot through with apples and pears problems (which is why the OECD attaches specific warnings of non-comparability to its figures, as we blogged here). And he fails to mention that HMT's UK debt projection omits hundreds of billions of off-balance sheet Enron debt (PFI, public pensions etc). And he fails to mention the trillions of contingent banking liabilities HMG has now assumed.

But setting all that aside, how reassured should we be that Japan, Italy, France and Germany have more public debt than us? Given that Japan has been stuck in a giant hole for nearly two decades now, Italy is... well... Italy, and Germany has never recovered from the dire fiscal consequences of its acquisition in the East.

Let's focus on our nearest and dearest cousin, France.

According to the OECD, in 2007, France's gross government debt was 69.4% of GDP. Ours was 47.5%, so on the face of it, we had a good 20% catch-up space. But note that because of definitional differences, the OECD's 2007 figure for the UK was already 10% higher than HMG's own official figure of 37%, which implies that HMT's official 57% debt/GDP forecast will take us right up to the current level of French indebtedness.

So how will that feel? Here's what the French Prime Minister said last year, even before the current crisis broke:

"I am at the head of a state that is in a position of bankruptcy. I am at the head of a state that for 15 years has been in chronic deficit. I am at the head of a state that has not once passed a balanced budget in 25 years. This can't go on."

Which doesn't sound altogether encouraging.

And neither does France's long slide down the international league table for prosperity: GDP per head is currently 7% below us, whereas a quarter century ago they were 10-15% above. In contrast, it has climbed up the table for structural unemployment (8% according to the OECD, compared to our 5%).

But it's on the tax front that the consequences really show. Whereas our taxes have been running at around 40% of GDP, theirs have been running at 50%. And part of that difference is accounted for by the higher interest payments they must pay on their higher government debt.

As we've blogged before, national bankruptcy can come in many different forms. At the extreme end we have the Argentine blow-out. But a long lingering death of high taxation and deteriorating public services would do just as well.

Already, the cost of issuing HMG debt is going up. Under the headline "UK and Italy struggle to entice investors" today's FT reported:
"The UK and Italy struggled to sell bonds on Thursday in a fresh sign of the difficulties governments are facing because of the debt needed for economic stimulus packages and bank recapitalisations.

The two bond auctions saw both governments forced to pay higher yields to attract investors and Italy scaled back the amount on offer.

Analysts say it is an “ominous” warning that debt raising is likely to become even tougher in the coming months if problems are emerging so soon after government announcements to increase issuance. A record of more than €1,000bn ($1,290bn) of debt is expected to be issued in Europe next year." (HTP Joan W)

And you know the really alarming bit? The market is bracketing us not with France, but with Italy. That didn't even happen in the 70s.

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