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THE DEBT TRAP

Graphs showing cumulative public sector finance and net debt
Naturally, the main focus of the press and the voters over the last week has been on domestic matters during the first shots of the general election campaign.

However, it is events that are taking place fifteen hundred miles away which indicate some of the future problems that may well face this country after the election.

If reports are to be believed, Greece will finally getting bailed out by the EU and the IMF next week amid rumours that the country can no longer fund itself following an exodus of capital and crippling interest rates.

On Friday, the credit agency Fitch also downgraded Greek debt to BBB-, just one notch above junk grade. Indeed, an increasing number of economists are warning that the EU/IMF rescue package may only delay the inevitable default by Greece which could lead to economic ruin.

Of course, the UK Government remains in denial about the scale of cuts needed to pacify the markets.

This despite the fact that the public sector net debt, expressed as a percentage of gross domestic product (GDP), was £857.5 billion (or 60.3 per cent of GDP) at the end of February 2010 compared with £712.4 billion (or 50.5 per cent of GDP) a year earlier.

For those who doubt the seriousness of a position where our annual public deficit, at 11 per cent of GDP, is just short of the situation in Greece, should read the following article on a recent report from the Bank for International Settlements.

The really worrying passages include:

“Interest payments on the UK's public debt will double from 5pc of GDP to 10pc within a decade under the bank's 'baseline scenario' before spiralling upwards to 27pc by 2040, the highest in the industrial world. Greece fares better, and Italy looks saintly by comparison.

“The BIS said the UK's structural budget deficit will be 9pc of GDP next year, the highest in the advanced world. A primary surplus of 3.5pc of GDP will be required for the next twenty years just to stabilize the debt at the pre-crisis level.

“The paper said that Labour's plan to consolidate the budget deficit by 1.3pc of GDP annually for the next three years is not nearly enough. Such a gentle squeeze will let public debt climb to 160pc of GDP by the end of the decade, accelerating to 350pc over the following twenty years as the compound interest trap closes in.”

Comments

Anonymous said…
Thank God someone in Wales is saying this. The usual politicos and press propagandists are arguing over trivialities that have no consequence at all. We are in the biggest s**t since the First World War and unless action to sort out this massive debt problem, we are all buggered.
April 11, 2010 10:14 pm
Anonymous said…
We could do with something of value to base our currency upon, and ends this boom/bust cycle. Gold bouillon anyone?
April 12, 2010 12:46 am
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