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Fiscal crisis continues to threaten our struggling economy

IT is hard to disagree with Standard & Poor’s that the Eurozone is likely to see zero growth until 2014. The situation is worsening again, especially in Spain, where the budget crisis is intensifying amid separationist tensions, and in Greece, which could soon be demoted to being an emerging market again by the FTSE. None of this good news for the UK, which remains in a poor way itself.

It is possible that the third quarter saw a rebound in UK growth, following the 0.5 per cent drop in the second quarter – that is what the government is hinting at, anyway – but nobody really knows. Some activity returned in September, especially in the City, but it is wrong to deduce from that the overall economy is recovering. GDP remains smaller than it was at its peak; other economies, such as the US, have long since more than recovered all the lost ground.

The biggest drag on UK demand remains falling real wages. This is still a major problem. Wages rose by 1.5 per cent over the past year; retail price index inflation was 2.9 per cent. People are getting poorer in real terms. Construction remains the other disaster area, despite data that is difficult to interpret: the government has slashed its own expenditure (the main area where there have been genuine cuts) but has failed to allow the private sector to start building new projects, such as airports. None of these two problems will change this year; so any green shoots will be limited.

The result is a fiscal bloodbath, especially given that overall public spending remains down barely more than one per cent from its peak. The deficit this financial year has already reached £31.0bn, a deterioration of £10.6bn excluding the one-off transfer of assets from the postal service.

Last year’s deficit figures were revised down again, and are now officially put at £119.3bn, compared with £125.0bn previously announced. There have been many such downwards revision since 2006; statisticians suddenly seem to discover under-spend or extra revenues, sometimes many months after the event. It is hard to know whether any of the statistics we use to try and understand the economy are even meaningful. It is therefore probably safe to assume that the present figures will end up a little better than they currently are, and the deficit for 2012-13 as a whole will probably come in at around £130bn, up £10bn (rather than down substantially, as the Office for Budget Responsibility had originally predicted).

Current spending – excluding capex such as roads – is growing as intended: it is up 3.0 per cent in April-August. The real problem is that revenues are up just 0.4 per cent, compared with a target of 3.7 per cent for the whole of 2012-13. Corporation tax receipts have collapsed 10.8 per cent, while income and capital gains tax revenues are down 1.6 per cent. It is a disaster for the government, which is being saved by the massive monetisation of its extra borrowing by the Bank of England.

There is no way the government will ensure that the debt to GDP ratio will be falling by 2015-16, its key fiscal target, unless it slashes spending by significantly more than planned, which won’t happen. The public sector net debt/GDP ratio was 36.4 per cent in 2007/08; it will probably hit around 90 per cent in four years time and much more on the Maastricht gross debt measure, a level at which international studies show proper growth becomes almost impossible to sustain. Long-run, unless the government suddenly discovers some radicalism, Britain’s prospects remain bleaker than ever.


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