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5 "Tells" that the Stock Markets Are About to Reverse

Bankrupt Britain's Public Sector Double Dip Debt Recession on Deep Spending Cuts

Economics / UK Economy Jun 11, 2009 - 12:55 AM GMT

By: Nadeem_Walayat

Economics

Diamond Rated - Best Financial Markets Analysis ArticleAndrew Lansley, the Shadow Health Secretary made the fatal mistake on Wednesday of telling the public the truth on Tory spending plans following the next election, which as we have seen by the expenses scandal is a big NO, NO when it comes to politicians. The truth that he soon backtracked upon was the fact that the Conservatives WILL make severe cuts in public spending of at least 10% across the board, regardless of the subsequent diatribe emanating out of the Conservative party to hide this fact.


However the fact of the matter is that whoever wins the next election (which according to the general election forecast will be the Conservatives on a projection of 343 seats, against Labours 225) will have no choice but to make deep cuts in public spending and large increases in taxes as Gordon Brown has put Britain on the path to bankruptcy to maximise the number of seats that Labour will retain at the next general election which is forecast to be held during May 2010. Any politician that is saying anything different i.e. 99.9% of politicians, are basically lying to the electorate.

Whilst the UK economy is on track to bounce back strongly into 2010, as indicated by the recent in depth analysis, however this economic recovery is based purely on debt as shown by the graph below, as the Labour government's strategy is to deliver the next Conservative government a scorched earth economy.

Alistair Darling's forecast for government net borrowing for 2009 and 2010 in November 2008 totaled just £70 billion. However, since the amount of projected borrowing has mushroomed to £350 billion, which is set against my November forecast of £405 billion for 2009 and 2010 alone, with continuing subsequent large budget deficits thereafter of more than £100 billion a year.

Whilst many economists were surprised by Alistair Darling's April forecast that the UK Economy would grow by 1.25% in 2010 and 3.5% in 2011. However we need to consider the following in that 1.25% growth on the annual GDP of £1.2 trillion equates to growth of just £15 billion and for 2011; 3.5% growth equates to just £42 billion. Therefore the government is borrowing a net £175 billion for 2009 and £175 billion for 2010 to generate £15 billion of growth, and then a further £140 billion for 2011 for £42 billion of growth. Thus total net borrowing of £490 billion to grow the economy by just £67 billion, (£595 billion my forecast) which shows the magnitude of the scorched earth economic policy now implemented that literally aims to hand the next Conservative government a bankrupted economy that will be lumbered with the consequences of continuing huge budget deficits and therefore necessary deep cuts in public spending.

Deep Cuts in Public Spending Expected.

Today's backtracking by all politicians from the minimum 10% cut in public spending hides the fact that even if the economy recovers strongly into 2010 (as forecast in Feb 09, some 4 months ahead of the National Institute of Economic and Social Research (NIESR)), however this recovery will still not be able to significantly erode the annual budget deficit which will remain at £100 billion+ per year unless the government makes deep across the board cuts in public spending of at LEAST 10%, which would equate to a cut in public spending of some £60 billion per year, well beyond talk of £3 billion here and £3 billion there for sub £10 billion totals. The British electorate needs to realise this that the real pain that they are going to endure for a decade or more will come AFTER the next election when the government has no choice but to both slash public spending and raise taxes as the alternative would be to ignite an out of control debt spiral (which we are already in at this moment in time).

NHS Spending Black Hole

Under the Labour government the public sector has become a funding black hole that threatens to bankrupt Britain, which is illustrated by the NHS spending black hole that has grown to more than 10% of GDP from 3.5% of GDP in 1948 that carries more than a million passengers on its its gravy train. As mentioned before every extra £1 spent on the NHS only generates barely 10p in increased output, where Britain spends 3 times the amount on the NHS per capita than most Eastern European States that still somehow manage to delivery a better health service and leaves Britain languishing at the bottom of the European Health leagues.

Incompetence, greed and waste are the operate words, NOT value for money or putting patients first as illustrated by an opinion poll amongst 156,000 NHS staff that found that patient care is not a top priority for the NHS. It is no wonder that patients in their hundreds of thousands are seeking private health screening and GP services.

GP Pay

Nothing illustrates the NHS spending black hole under the Labour Government more then the debacle over GP Pay Contracts as the below graph illustrates. The new contracts that came into force for the year 2003-04 saw GP Pay soar during the following 3 years by as much as 35% per annum. If GP Pay had grown in line with average earnings then the current average GP salary should be £68,000 against the actual average of over £125,000.

According to the National Audit Office, the number of NHS GP's has increased by 15% from 26,833 to 30,931 since 2003, this is as a consequence of the GP contracts debacle, at the same time GP's are working on average 7 hours per week less, therefore a cut in productivity of 18% on a normal working week and thus on balance resulting in little improvement in patient healthcare despite a tripling in costs, with the National Audit office reporting am actual continuous year on year loss of overall productivity.

In fact the MP expenses scandal is in part attributable to the huge pay disparity that has grown up in recent years between MP pay and GP Pay as when Labour came to power in 1997 average MP pay was £43,722 against average NHS GP pay of £44,000, so both were inline with one another at that time. However as the below graph clearly illustrates in 2003 something started to go seriously wrong with GP Pay which took off into the stratosphere as GP's awarded themselves pay hikes of more than 30% per annum that has lifted average GP pay to £126,000 per annum against £64,000 for MP's.

Bankrupt Britain's Liabilities

As I have warned several times over the past 12 months and which is now starting to come to pass in that total liabilities are set to grow from £1.75 billion at the end of 2007 to £3.9 trillion by the end of 2010 as a consequence of the £2 trillion of liabilities of the bankrupt banking sector being ceremoniously dumped onto the tax payers in addition to the public sector deficit spending of £600 billion on which the country will have to pay interest on which worsens the fiscal situation during each subsequent year, hence the real risk of an out of control debt spiral.

The consequences of all this deficit spending and growth in liabilities is highly inflationary as the Governments Big Idea of "Printing Money" WLL eventually lead to hyperinflation as 1920's Weimar Germany found out, so Britain IS sowing the seeds of much higher inflation, maybe not this year and for the first half of 2010 as recent inflation analysis illustrated, but there will be a deficit spending and quantitative easing day of reckoning in terms of economic stagnation coupled with high inflation that will land on David Cameron's lap.

Double Dip Recession

Total GDP contraction to date now stands at -4% on a quarter on quarter basis, which is against my forecast for -6.3% total into Q3 2009, however recent analysis strongly suggests that GDP contraction during the 2nd and 3rd quarters for 2009 is moderating and points to a strong bounce back in the economy into the 2010 election given the extreme measures adopted of deficit spending of £500+ to generate just £67 billion of additional economic growth, however the post general election tax hikes and deep public spending cuts will my opinion trigger a double dip recession during 2011 to 2012 as illustrated by the below graph. Therefore my growing expectations are now for recession GDP contraction that is less than the forecast -6.3%, which also implies stronger growth during 2010, which will NOT be sustained during 2011 and beyond as the economy does an about turn on under the weight of the unsustainable debt mountain.

Debt Crisis Solutions

The solutions to Britians debt crisis remain as much as voiced in the November 2008 article - Bankrupt Britain Trending Towards Hyper-Inflation?, and expanded upon during February 2009. The really radical long-term solution of privatisation of the large un-productive entities such as the NHS would require a large majority government which does not appear likely at this point, which therefore suggests that the next government will fail to fully address Britain's growing debt problem that for each extra £100 billion borrowed will result in extra annual interest payments of at least £5 billion, therefore £500 billion of new debt will add an extra £25 to £30 billion in interest to Britain's debt mountain which is more than Britain earns from North Sea Oil (£17 billion) and therefore threatens to send debt spiraling out of control unless drastic action is taken to bring public debt under control.

My next in-depth analysis will aim to update the UK interest rate forecast of December 2008 that called for UK interest rates to start rising during the second half of 2009 as illustrated by the graph below. To receive the in-depth analysis in your email box, make sure your subscribed to my always free newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mr Tips
11 Jun 09, 08:42
Gordon Brown Liar

Some economists say that there must be a complete freeze in public spending for five years, and Brown can put wool in his ears and ignore them. But they are right.

Whatever Brown and his team of incompetents say there will be severe staff cuts in all but front line jobs in the bloated public sector. If not, the unrest in the private sector will be impossible to contain. And most of this is down to Brown's insane profligacy.

Brown's statement that he had abolished boom and bust was that of a moron, but he believed it and thought that growth would continue ad infinitum. So he spent and borrowed as if there was no tomorrow. Now we are reaping the harvest.


Gerry
11 Jun 09, 09:00
Public sector pensions fraud

Since the government is bankrupt, now is the time to stop Public Sector pensions, just like those in the private sector, who have lost theirs because there is no money.

We are sick of hearing how they pay into the scheme. So did thousands of private pension holders, why should the government treat those employed by it differently to everyone else?

Our Local Council BORROWED over £1,000,000 to pay over inflated redunancy money they didn't have, whilst private sector workers had to claim government minimum. When will this end ?


Mike
11 Jun 09, 09:11
public sector liabilities top £1trn

The accumulated liability of unfunded public sector pension schemes is greater than the national debt, a Policy Exchange report claims.

Public Sector Pensions: The UK's Second National Debt, said using the government's own calculations, public sector pension liabilities stand at £1.1trn, or equivalent to 78% of GDP.

It added the cost of servicing the debt each year to pay for these unfunded schemes is now £45.2bn.

The think tank claimed the government had been using "financially indefensible methods" to work out its liabilities and how much workers need to contribute to the schemes.


JS
11 Jun 09, 09:32
Public sector

The public services are full of managers who cannot do their job, seat warmers and people who have become apathetic. There is no incentive to work or to succeed.


Jim H
11 Jun 09, 09:55
Conservatives failing to capitalise

One interesting development in the recent elections is the appearance that the Tories will NOT gain a significant majority.

The thought occurs that with the distinct possibility of a hung parliament we could shortly be looking at a Labour/Lib Dem coalition.

I dread to think what sort of mess Labour would make of the economy if given another term in office. So far they have appeared hell bent on an economic slash and burn technique to buy off the electorate. What odds on the Chancellor repealing his proposed spending cuts in 2011 if Labour retains power?

I get the chills just thinking about it.


JJ
11 Jun 09, 10:06
worse to come

Am I the only businessman to think that we haven't seen the real problems yet? Compared to 1990-1 this has been relatively mild. And yet logic says it should have been far worse. I'm confused!


John Wickenden
11 Jun 09, 23:55
a scorched earth economy.

as the Labour government's strategy is to deliver the next Conservative government ascorched earth economy.

.....this is a very strong statement.

Unless you can back it up with evidence I'm concerned the Oracle's going down the same road of unjustified rhetoric as the gold bugs.

You may of course be right.

Care to try with the evidence?

regards

John Wickenden


Nadeem_Walayat
11 Jun 09, 23:56
Not Rheteroric
Hi

I know it's difficult for many to comprehend how bad things are especially as the current recession does not for many feel like worst recession since the great depression but that is because of -

We have never ran annual deficits of 12% GDP in our peace time history, much worse than the crisis of the 1970's, I don't see how anything the next government can do that will turn this around without years of high inflation and stagnation.

Come start of 2011, I expect we will be seeing major signs of being in deep doo dah, not a question of rhetoric but the consequences of the debt. off course I will continue to analyse in an unbiased manner as I do it for the benefit of my own portfolio so cannot afford sticking to rhetoric that may turn out to be wrong as that does not help my portfolio, much better to get it right and make some money or avoid losses than go down the biased political route. But there are times when I NEED to MAKE it clear so that there iS NO DOUBT, much as I voiced in Mid march that the stock market HAD bottomed and begun a stealth bull market. Much as I stated that the banks are all bankrupt before Lehman went bust, Much as I said in August 2007 that House prices has peaked and were heading for a 2 year crash. The conclusion has to be strong to ram home the significance which may be interpreted as political rhetoric when it is not as I am not politically biased in favour of any party, as my articles of early October 2007 concluded that Gordon Brown should go for an election then else he would blow his chances of re-election.

Best Nadeem Walayat
WSJ
18 Jun 09, 08:56
Tories reject spending cut claims

The Conservatives have rejected Labour claims that they are planning "massive" cuts after the next general election. Shadow secretary to the Treasury Philip Hammond accused the Treasury of being "deeply disingenuous" on public spending.


WSJ
18 Jun 09, 08:57
Spending row 'juvenile' - Tories

Philip Hammond says the Tories would prioritise health spending The Conservatives have once again dismissed Labour claims they have "let the cat the cat out of the bag" on plans for large public spending cuts.


WSJ
18 Jun 09, 08:57
Labour must be honest about public spending

Andrew Lansley, the Conservative health spokesman, warned yesterday that there would have to be a 10 per cent reduction in public spending under a Tory government, though budgets for hospitals, schools and overseas aid would be ring-fenced.


WSJ
18 Jun 09, 08:58
Brown accuses Tories over public services spending

Gordon Brown accused the Tories today of planning deep cuts in public services after a senior member of the Shadow Cabinet said most departments would have to slash budgets by 10 per cent.


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