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Read Gordon's lips: debt's going way above 40%

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Paul Mason | 21:18 UK time, Thursday, 4 September 2008

Here is one key passage of Gordon Brown's Scottish CBI speech:

"While never complacent about our economic prospects, I am also cautiously optimistic about the long-term resilience and underlying strengths of the British economy. Because at root our economy today is better placed to weather any global economic storm than it was in the 1970s, 80s or early 90s."

I will examine the claim in a minute. But the important thing to note is the change of emphasis. While he has said this before, he has usually also used the "better placed" phrase in relation to other major economies, such as in his May 2008 Guardian interview with Nicholas Watt:

"I also believe that Britain is better placed than most to withstand the global turbulence because of the decisions that we have made both recently and in the past."

And the source of the PM's optimism in today's speech is not just the policies he's pursued over the past 10 years, but the ones he's formulating now:

"It is the actions that governments take and the policies they pursue in periods of economic slowdown that can determine their comparative success and competitiveness in the upswings. Once we are through this global crisis, we will continue to enjoy the opportunities that the global economy offers to us."

This is where I think, in the unlikely event of Newsnight getting him in front of a camera, I would like the questioning to start....

Let us just reiterate, the OECD this week gave the UK the lowest projected average quarterly growth over 2008, at 0.1%. Unfortunately the UK's current GDP growth or shrinkage is not mentioned in the PM's speech - but everybody else's declining growth is. This graph, from the OECD shows the UK is currently in the worst state of all the major economies. And this PDF is the source of the claim that the UK will be the only major economy to enter recession in Q3/Q4.

But it is that "once we are through the global crisis" that I would really like to see the PM grilled on.

He's called that crisis: "The first great financial crisis of the global age with a global credit crunch and global rises in commodity prices."

Once we're through it, runs the flow of the speech, all the wind farms, loft insulation, labour market reforms, productivity etc will see us through. Oh and there's a very interesting sentence on debt I will come back to.

I would like to specualte on an alternative scenario: that the first big crisis of globalisation redraws the map of the globalised economy and that no amount of competence in economic management offsets its impact on the UK.

First off: there is a major chance that this first big financial crisis of globalisation actually sinks enough big financial institutions that the whole landscape changes. This is why Mr Brown and the Bank of England have carefully put in place a "special resolution regime" for collapsed banks. And Mr Brown tacitly acknowledges: our financial services dependence means that if there is a financial meltdown the UK economy could be up a very unpleasant creek.

There is also a serious chance that the Doha trade round never comes back to life, especially if the Democrats win the US election. There is also an uncomfortably bigger than negligible chance that Israel will go to war with Iran, or that Russia will use military force plus destabilisation against Ukraine and even Estonia. That will push energy prices to the point where global depression is on the cards.

The crisis, in other words, contains the potential for shocks and is three dimensional. It's not just a dip and it's not just economics: it's a linked series of vulnerabilities in the world market system. (By the way, no apologies to all those in the blogosphere who think I should stick to demand curves; this is called political economy and you will probably like the sound of the guy who invented it).

In the context of those vulnerabilities how does the UK's political economy look?

In the first place, flexible labour markets have I believe certainly contributed to this being the first recovery in which there was no rise in real wages, no wage-push inflation. Or more precisely, flexible labour markets plus mass migration from Eastern Europe. Even MPC doomsayer David Blanchflower says unemployment will peak at 2m in part because of migration and flexibility. So that's a plus.

On central bank independence, which Mr Brown claims is the source of our current financial stability, I think there is more to discuss: as we explored last night on Newsnight, it's possible that inflation targeting will no longer be enough to ensure stability and growth; that just as we are importing inflation now, it may have been that much of the stability/deflation was also imported. The policy framework may have to change - and see below on the debt bit to see where this is going.

The source of Mr Brown's optimism is that the world economy will double in size in the next few decades and there's a lot to play for. But it's possible that the emergence of rival trading blocs, bilateral trade deals, the collapse of the globalisation process represented at Doha, create - even on the economic plane - a situation in which Britain is not the automatic beneficiary of such growth. Trade, as I know all too well, is a subject that makes people's eyes glaze over: we cover it about once every two years when Peter Mandelson throws his toys around in advance of a meeting in Geneva. However, stuck on the edge of Europe, with a relatively high-tax regime compared to eg Poland and Ireland, a huge social overhang of pension liabilities and the ageing population, it is not a foregone conclusion that Britain is the beneficiary.

In particular because we have a small and - while excellently productive and modernised - vulnerable manufacturing industry. It is just 16% of GDP. The Eurozone has 28% of GDP; the USA about 35% of GDP.

Already, Britain's position within the global trading system, while making London home to one of the free-est financial services markets in the world also makes places like the East Midlands and East Anglia synonymous with low-wage, low value added industry.

I could go on, but I just think the UK is more vulnerable to the vagaries of any deep and cataclysmic financial crisis than is being admitted. Let's hope we don't have to find out. I know there will now be a tit-for-tat argument over e.g. fuel rebates but I would like to see a more thoughtful discussion among the politicians over: is what we have done over the 16 years since Black Wednesday, on productivity, skills, infrastructure etc anywhere like enough to deliver what the PM says it will deliver - namely a soft passage through the turmoil.

Now here's the debt bit. There is an obvious kite being flown - indeed more than flown, hoisted, when Mr Brown tells us:

"Fourth, low debt. The significant debt repayments we made since 1997 mean we have cut public debt as a share of national income from 43 per cent in 1997 to today's 37.3 per cent. This means that, unlike in earlier economic slowdowns, we can sustain our ongoing commitment to investment in fixed capital infrastructure - up 58 per cent in real terms in the last decade."

I will tell you what this means: it means they are thinking of borrowing a lot more than 40% of GDP.

This relative lowness of UK debt on an international scale is real, and has been the subject of after-action barstool conversations between myself and various guests on Newsnight over the past couple of weeks.

Public sector net debt is currently £543 billion and represents 37.5% of GDP. The government thinks it will edge up to 38.5% by the end of the fiscal year. The IFS think tank said, even before accounting for Northern Rock, the government is just 2.8bn pounds - or 0.2% - away from breaching its own "golden" rule that net debt should be below 40% of GDP.

However, Brown is right. Other countries are massively more indebted than we are, and he is also right that this is partly because he has paid down debt in the past. For example (roll Jeux Sans Frontieres music): Japan - 195%; Italy - 104% of GDP; France - 64% - it goes on.

I take this as a cast iron signal that the Pre-Budget Report will give some kind of clear signal of a tax cutting, 40% busting fiscal package to stimulate the economy, which will make everything announced so far look puny.

But here's a thought: if the government breaches its own rules, and runs up a debt into the mid-40% range - will Messrs Cameron and Osborne still feel obliged to match Labour's spending plans penny for penny out to 2011?


  • Comment number 1.

    Debt levels are almost meaningless as the Treasury does no know how to (or wilfully will not) keep proper accounts, in particular in the treatment of PFI/PPP.

    Somehow borrowing money at huge interest rates is less expensive than Treasury debt - this is numerical insanity!

    I have no idea what the real figure is except that it must be substantially greater than 40%.

    (Can anybody add up all of the PPP/PFI contractual liabilities and work out the effective current cost? I haven't access to the data, but I guess there is someone at the Treasury that has!)

  • Comment number 2.

    The Fed has two lists of banks that might fail. One has 100 banks on it, the other 1600. There are reports of 'crash' courses to train people to deal with bank closures in the US.

    Today unemployment figures hit the markets and look. woosh.

    If this winters fuel bills don't get people then the next one will [when is the election?]. which is why we need a two way grid to generate hundreds of thousands of jobs, billions in income and lower energy prices for the ordinary people. The uk is one of the few countries to deliberately not have a two way grid. Why protect the energy monopolists and their one way grid and bogus gas prices. [where is gas today? compared to july?]

    Brown maybe talking like the shopkeeper in the dead parrot sketch ['its not dead but pinning...'] buts its not kind to do so when there is a refusal to act on things like a two way grid.

    In this game of its a knockout the British Govt are playing their joker...

  • Comment number 3.

    "This relative lowness of UK debt on an international scale is real ?"

    Does this include PFI or is that off the books still ?

  • Comment number 4.


    Mr Browns "Einstein" joke was good !

  • Comment number 5.

    What the hell does this mean-

    'Or more precisely, flexible labour markets plus mass migration from Eastern Europe. Even MPC doomsayer David Blanchflower says unemployment will peak at 2m in part because of migration and flexibility. So that's a plus'.

    You need to say what you mean and what are basing this on, so people can dissect it.

  • Comment number 6.

    Why has everyone been so blind about the worlds greatest chancellor?
    He was as incompetent in that post as he is now.
    He is what I'd call a surfer. He rode on the crest of the wave of world economic growth. As soon as the economy slows he falls into the sea. He grabbed money out of the economy and saved nothing.
    As this world boom turned he just changed the size of the wheels on his economic cycle to cover overspending.
    He should loose his own property portfolio as part payment for incompetance.
    Does he have any qualifications in economics?
    The whole illusion is comparable to all those 'house buying' programs we've had recently, where if you watched closely it didn't matter what the punters did to the building [including nothing]; they STILL made money. Watch those programs disappear alongside the Brown myth.
    Good riddance to bad rubbish.

  • Comment number 7.

    so nice to know Gordon has caved in to the energy companies over windfall tax, their profits are up, they have increased the dividend to shareholders only it will be 'too complicated' to bring it on. The hundred or so backbenchers timing their revolt will have a conference, and their constituents to pacify but we all know the result...a few thousand pensioners making the choice this winter of whether to starve or warm themselves. And this....from a Labour government.

  • Comment number 8.

    #6 Markonee1

    "Does he have any qualifications in economics?"

    You might ask the question about the Treasury and accounting too. (c.f my i #1 and others comments about PFI/PPP accounting.)

    "Rubbish" he may be but the other lot are/could be far far worse.

    P.S. Anybody from anywhere (including the Treasury) going to let us know the real indebtedness including PFI/PPP? I'll start with a guess of 200+ per cent of GDP or say 3 Trillion pounds. (but it depends on how you account for future cash out flows.)

  • Comment number 9.


    This is to support John (#8) in a call for definitive numbers relating to PFI/PPP.
    We keep hearing 'off balance sheet' but they must be somewhere - or perhaps not; like imaginary world-money that just disappeared.

    Comment please Paul.

  • Comment number 10.

    It comes to something when a City pundit a few weeks ago said Britain are in a worse position than any other country to trade their way out of recession when the time comes because of our p*ss poor manufacturing base.

    It's taken 100yrs for the elitest City to look past their Champagne lunches and admit the country doesn't revolve around the City but it is manufacturing (see Germany and Japan or the rise of China, Taiwan and Korea) is what makes an economy wealthy and strong.

    Britians balance of trade has been in constant deficit for decades held from collapse (financed) by foreign investment (buying up Britain - is there anything left to buy?).

    And Labours (mis) management, huge public spending binging, wasteful and delivering not a penny in value, huge tax grabbing (now 50% of GDP) and racking up credit card debts too has saddled the country with a burden the country will carry for decades.

    Gordon 'bankrupt' Brown a "safe pair of hands" like Eddie the Eagle's a safe bet for a Gold Medal! Labour are incompetant frauds. Everything about this Socialist clown show needs to be ended and shut down for the health of the country,


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