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Brown Breaks Another Golden Rule, Real UK Debt Above 40% of GDP

Economics / UK Economy Jul 18, 2008 - 07:10 AM GMT

By: Nadeem_Walayat

Economics Best Financial Markets Analysis ArticleFollowing abandoning of the rule for a balanced budget over an economic cycle, which was broken more than two years ago and followed by repeat manipulation of the start date of the economic cycle and has since been quietly forgotten from Treasury statements. Now the next golden unbreakable rule for economic competence that Gordon's Darling is busy reconstructing for the electorate to swallow is that Government debt must remain below 40% of Gross Domestic Product (GDP).


Britain will probably pass above the 40% barrier later this year on official data release, so the government is laying the groundwork for a pre-emptive measure of damage limitation than planning to cope with the recession that the UK looks set on entering during 2009, which will see the gap widen much further between growing government expenditure on public services and shortfalls on tax receipts that have already been added to by the £3 billion tax give away to try and win votes during the May elections. However the real amount of government debt is far higher than the official data as the data does not include the bailout of Northern Rock bank running at over £30 billion and nor the estimated £100 billion swap of UK government bonds for junk illiquid mortgage backed securities that despite the rhetoric of being temporary may turn out to become a near permanent debt. If both of these were included then UK debt as a percentage of GDP would already be running at over 48%, add perhaps another £100 billion of financing to the banks over the next 12 months and next years estimated additional government debt of £60 billion (optimistic), then that would put UK government debt at nearer 60% of GDP by the end of 2009.

Therefore it is increasingly likely that the government will seek to further manipulate the official debt levels by even more off the book accounting practices to try and mask the true level of UK government debt. However this will be reflected in the foreign exchange markets as the British Pound will continue to weaken relative to the stronger currencies and result in higher interest rates as the Treasury seeks to attract investors to the flood of newly issued government bonds that could see the number of bonds outstanding explode by more than 50% as none of the official estimates and data take into account the consequences of the ballooning budget deficits and hence government borrowing that would occur during a recession.

Whilst we are on the subject of ' golden rules', another truly busted golden barrier is the Bank of England's 3% CPI inflation upper limit, with inflation trundling along on an upward curve presently at 3.8% and destined to smash through 4% rate which will lift inflation to more than twice the banks target. It is a wonder on what basis the Bank of England conducts monetary policy where the forecast is ALWAYS that the inflation rate will be 2% in 2 years time? So what happened 2 years ago? When the Bank of England was busy slashing interest rates and pumping the money supply in the midst of a housing bull market and strong economic growth.

Exactly on what basis is the BoE making its decisions that arrive at inflation of 2% in 2 years time, which lends me to believe that the problem at the heart of the BoE is that theory rules over basic commonsense i.e. In a series of articles at the Market Oracle during late 2006 the commonsense view was clear that the Bank of England would have to do battle with inflation and raise interest rates towards a target of 5.75%, following which the forecast as of August 2007 and September 2007 has been for a cut in UK interest rates to 5% by September 2008 as a consequence of the UK Housing bust and credit crisis which had just begun to unfold at that time.

Meanwhile the IMF is giving Britain a slightly better economic report by lifting 2008 forecasts to 1.8% and prospects for 2009 to 1.7%. Though one has to wonder perhaps what the IMF theoreticians are still smoking given that the IMF forecast for Britain's GDP growth for 2008 was 2.3% in late 2007, which the IMF has continually revised so as to converge with the actual growth rate for 2008 by the end of the year, which basically defeats the whole purpose of making forecasts. Whilst at the same time the Market Oracle forecast has stood fast for a forecast GDP growth rate for 2008 of between 1% and 1.3% as of December 2007. The current range of 2009 consensus forecasts at between 1.4% and 2.25% which seem overly optimistic as the UK will flirt and possibly enter into recession during 2009, therefore any recovery into 2009 year end may not be able to lift overall growth to much above 0.6% for the year as a whole.

Summary of UK GDP Growth Forecasts for 2008 made during 2007.

  • Market Oracle 1% to 1.3% (Dec 07)
  • CBI 2% (Dec 07)
  • UK Treasury 2.15%, 2.5% for 2009 (Dec 07)
  • European Commission 2.2% for 2008 and 2.5% for 2009 (Dec 07)
  • Oxford Economics 2.3% (Dec 07)
  • OECD 2% (Dec 07)
  • International Monetary Fund 2.3% (Oct 07)
  • Capital Economics 2% (Dec 07)

As recent articles have warned, the current inflationary run is expected to peak by mid 2009 as the deflationary impact of economic contraction and the housing market price deflation diminishes inflationary pressures, thus creating an atmosphere for cutting UK interest rates. However, in the meantime the problem that the Government and the Bank of England faces is the risk of igniting a domestic wage price spiral which would push the UK into a prolonged period of stagflation during 2009 and into 2010.

Recent Analysis of the UK Economy

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

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 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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