Monday, June 21, 2010
Will George Do Enough?
When it comes to deciding whether individual governments are over-indebted, the financial markets have long had a rule of thumb, one that has been taken up by international organisations like the IMF, the OECD, and the EU. It is that an individual government should not run up debts equal to more than 60% of its country's GDP (the maximum under the original Maastricht rules).
Why 60%? Well, it's not cast in concrete, but history tells us that once governments go above that level, they are in the financial danger zone. Debt interest is burdensome, and there's no more wiggle room. Unforeseen problems like future recessions can leave them highly vulnerable to a collapse in market confidence - struggling to convince investors they should lend more, undermining their bond markets, and plunging their currencies into the abyss.
Right now (2010-11), the UK is on 78%, so already well above the safe limit. And according to last week's forecasts from the Office for Budget Responsibility (OBR), our debt ratio is set to rise to nearly 90% by 2014-15.
Except of course, it's even worse than that. As regular BOM readers will know, once we add in Brown's off-balance sheet Enron debts, like PFI and public sector pensions, HMG's total debts more than double from the officially declared level (a point highlighted by the OBR themselves).
And that is the scale of George's task. He has to chart out a credible path to get our government debts - our real government debts, that is - back below 60% of GDP.
First, and foremost he has to cut spending. And we'll be watching his delivery on that score very closely (including a credible commitment on those expensive public pensions).
Second, he has to get the economy moving. A bonfire of red tape for sure, but critically, he has to cut business and payroll taxes, and not fund those cuts by increasing other taxes.
Third, he has to be radical on public sector reform. What that means more than anything is letting go - a wholesale move to choice and competition and away from state monopoly (see many previous blogs). Only by doing that, can we ever hope to cut waste in the public services and improve productivity.
Tomorrow we'll be following this landmark budget from the TPA's office, and we'll post some reactions on the TPA website.
England expects, George.