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Urgent Stock Market Message

Conservative £7 Billion Spending Cuts a Drop in Britain's Debt Ocean

Economics / UK Debt Oct 07, 2009 - 08:02 AM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleShadow Chancellor George Osbourne announced net public sector spending and budget cuts totaling £7 billion at the Conservative party conference. However the proposed cuts are but a mere drop in the debt ocean that on their own do not amount to anything of real significance when one compares to an annual budget deficit that is expected to break above £200 billion this fiscal year.


Britains Growing Debt Mountain

Despite the fact that both major parties continue to ignore the real amount of growing debt and liabilities as a consequence of both bailing out the bankrupt banks and irresponsible public sector spending over the past 10 years that for instance saw NHS GP's increase their salaries by more than 30% per annum whilst working less hours with the final action of the Labour party fuelling a debt fuelled economic recovery into the 2010 General Election, as the below graph illustrates.

Still the public sector net debt is growing at an alarming rate that seriously risks bankruptcy of the country Iceland style which would manifest itself in an collapse in confidence of the British Pound, this is not something that would occur over months or weeks, but in days, so is not something that should be risked under any circumstances Instead both parties and especially the Labour party continue to play with fire that would risk an economic collapse into hyper inflation where all savers would lose value of their savings and the economy would slump by over 30% literally overnight.

In this light Conservative cuts of £7 billion and Labour nonsense of no cuts is seriously irresponsible behaviour and completely untruthful when it comes to informing the British population on the dire state of the countries finances as I warned of last November - Bankrupt Britain Trending Towards Hyper-Inflation?

The seriousness of the situation is illustrated by the fact that the UK looks set to achieve a budget deficit of more than £200 billion in the current fiscal year, with already proposed Labour tax rises such as the new 50% tax rate, across the board NI rises and the return to 17.5% VAT, coupled with stagnant public sector spending are set to reduce the deficit over the next 5 years to 120 billion per year as the following graph illustrates.

Against the forecast budget deficit the conservative party now proposes an additional cut of £7 billion per year which would result in the following outcome where the national debt is concerned -

Year Annual Budget Deficit Conservative Cuts Total PSND
2008 90 0 624
2009 185 0 809
2010 213 7 1022
2011 183 7 1205
2012 133 7 1338
2013 108 7 1446

 

As you can see the cuts of £7 billion have NO Impact on the deficit and growing debt mountain whatsoever, as the overall debt as measured by PSND would pass 100% of GDP sometime during 2011 and continue growing each year to hit 120% of GDP by 2013 the consequences of which would be severe in terms if high inflation and interest rates.

What Does this mean ?

This means that the public is not being told the truth on the degree of both public spending cuts necessary and tax hikes. Where the amount necessary to impact the deficit is in the magnitude of more then Four times of that which has been announced to date i.e. totaling tax rises and cuts of at least £40 billion and preferably £50 billion which would stabilise the countries deficit to below 6% of GDP as the below table illustrates.

Year Budget Deficit Proposed cuts Total PSND
2008 90 0 624
2009 185 0 809
2010 170 50 979
2011 140 50 1119
2012 90 50 1209
2012 65 50 1274

 

To achieve a deficit reduction of £50 billion would require public spending cuts of £30 billion which translates into a reduction in the public sector of some 10% or 600,000 jobs and therefore would trigger the double dip public sector recession warned of during February 2009 - UK Public Sector Contraction to Trigger Double Dip Recession

Additionally, tax rises of £20 billion could see the basic tax rate rise to at least 24p and VAT to more than 20%, in addition to many stealth tax rises as economic contraction would result in less tax receipts.

Both of these measures would be extremely painful in the short-run but would avoid a currency collapse in the longer run the consequences of which are far, far worse as the Weimar republic experienced during the 1920's.

Labour Government Playing with Fire

The Labour governments irresponsible answer to the debt crisis is to basically deliver the conservative government a scorched earth economy at the next general election. If that were not bad enough the government authorised the Bank of England to detonate the nuclear options of a. Quantitative easing primarily for the purpose of monetizing government debt and b. ZERO interest rates with a view to igniting high inflation and therefore attempting to inflate the country out of the debt crisis Zimbabwe style.

UK Economy Election Bounce into Double Dip Recession

The forecast date for the next General Election as of October 2007 has been for May 2010, with the projected seats implying a small Conservative victory of a majority of 36. Clearly all is seen as not being lost for the Labour government, therefore the primary has been to reduce this projected small majority by as much as possible, to achieve this the government has thrown ALL of the fiscally responsible rules out of the window starting last October having embarked on a programme of maximising the number of seats Labour will retain at the next general election. One of the key milestones set by the Prime Minister Gordon Brown of achieving this objective is in successfully and publically achieving a strong economic bounce into May 2010. My on going analysis confirmed a bounce into a May 2010 general election as long ago as February 2009, with more recent analysis confirming this outlook (UK Economy Set for Debt Fuelled Economic Recovery Into 2010 General Election)

Whilst the OECD and other mainstream organisations / press have been busy in recent months revising their economic forecasts, my forecast remains as is and continues to project towards post general election tax hikes and deep public spending cuts that will in my opinion trigger a double dip RECESSION, even DEPRESSION 2011 to 2012 as illustrated by the graph below.

Summary of Solutions to Britains Debt Crisis

What needs to be done -

1. Short sharp shock to bring the deficit to under 6% of GDP (current 15%), by means of deep spending cuts and tax hikes.

2. Thereafter to continue to grow ones way out of the remaining deficit.

The above actions suggest at least 5 years of economic stagnation of high taxes and low growth.

The alternative is to go down the current route and wake up one day to a financial and economic crash worse than that of 2008. As I have warned several times over the past 12 months, the markets won't wait for the debt to grow to crisis levels, they will act in a panic state well ahead of the academically calculated logical ratio's of Debt to GDP, until then the debt time bomb continues to tick ever louder, unless action is taken.

Ensure that you are subscribed to my always free newsletter to receive in depth analysis of a forecast for the UK economy covering the next 10 years.

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 400 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.

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