Liv­ing on tick

Now is when Europe’s tax cof­fers run dry

The Daily Telegraph - Business - - Front Page - Matthew Lynn

At first glance, not a lot was go­ing on last Tues­day. Priti Pa­tel was des­per­ately try­ing to hang onto her job, un­suc­cess­fully as it turned out. Don­ald Trump was mouthing off on a trip to South Korea. Manch­ester City were ru­moured to bid­ding for an in­cred­i­bly ex­pen­sive foot­baller, and some­body some­where was in­evitably moan­ing on about Brexit. It was all fairly run-of-the-mill stuff.

But for num­ber-crunch­ers, some­thing in­ter­est­ing hap­pened. It was the day when France ran out of money. As of Nov 7, all the money the gov­ern­ment raises through its taxes – and this be­ing France, there are lit­er­ally dozens of them – had been spent. The rest of the year is fi­nanced com­pletely on tick.

And yet France is far from alone. All the main Euro­pean coun­tries, the UK in­cluded, are run­ning out of tax rev­enue well be­fore the year is over. That is wor­ry­ing for three rea­sons. It is re­minder that spend­ing is still way too high. It tells us that gov­ern­ments have failed to curb deficits. And it is a warn­ing that next time there is a re­ces­sion gov­ern­ments won’t have any room to re­spond with a fis­cal boost.

There are lots of dry ways of point­ing out that gov­ern­ments are spend­ing a lot more money than they raise in tax rev­enue. Economists and statis­ti­cians wheel out debt to GDP ra­tios and chan­cel­lors and fi­nance min­is­ters set tar­gets for deficit re­duc­tion. Those, how­ever, usu­ally come in hard-to-fol­low per­cent­ages, or else the bil­lions and bil­lions in­volved pile up so quickly that most of us sim­ply glaze over. But in France, the In­sti­tut Moli­nari has come up with a very neat way of il­lus­trat­ing the is­sue in sim­ple terms. It works out the mo­ment in the cal­en­dar af­ter which ev­ery­thing the gov­ern­ment does has to be fi­nanced through bor­row­ing. If you wanted to, you could call it the day the money runs out.

So how’s that go­ing? France, per­haps not very sur­pris­ingly, turns out to be the coun­try that is out of cash first. A gov­ern­ment which last man­aged to bal­ance the books in 1980 used up all its money with 55 days of the year still left. That was a day ear­lier than the year be­fore, and four days ear­lier than back in 2014. France is not only liv­ing be­yond its means, but it is now do­ing so at an ac­cel­er­at­ing pace. And that was de­spite the fact that taxes and so­cial se­cu­rity charges have gone up. Once those charges are com­bined, the state is rak­ing in 53 per cent of GDP in rev­enues – its prob­lem is that it then spends an even more mas­sive 56 per cent of GDP over the same pe­riod.

But it was far from alone. Spain ran out of money on Satur­day. Over in Ro­ma­nia, the bank ac­count was empty as of yes­ter­day. Next week, Poland will be out of cash, fol­lowed by Italy, which will be of­fi­cially skint on Nov 26. In the UK, our politi­cians will have of­fi­cially spent all the in­come tax, cor­po­ra­tion tax, VAT, fuel duty they take from us by Dec 7.

Across Europe as a whole, cen­tral gov­ern­ments will be out of money on Dec 6. Only four EU coun­tries man­age to make it through Christ­mas and into the new year still in the black. They are Cyprus, Malta, Germany, and a sur­pris­ingly thrifty Swe­den, which gets all the way to Jan 20. They are the ex­cep­tion, how­ever. The norm is now for spend­ing to be way ahead of the money col­lected in taxes.

That is not al­ways a prob­lem, of course. Very few peo­ple would ar­gue that we should go back to the days be­fore Keynes where any kind of deficit in even the most dire of cir­cum­stances was re­garded a sign that the world was about to end. In a re­ces­sion, it makes sense for gov­ern­ments to bor­row a bit more, and get busi­nesses mov­ing again and peo­ple back into work. Nor is there nec­es­sar­ily any­thing wrong with gov­ern­ment bor­row­ing to in­vest, al­though a lot of what of it “in­vests” in may not nec­es­sar­ily have the re­turns that are promised.

But there is a dif­fer­ence be­tween that and huge and per­sis­tent deficits. The Euro­pean econ­omy, helped along by a cou­ple of tril­lion eu­ros of printed money, is do­ing OK this year. The EU as a whole is fore­cast to ex­pand by 2.3pc, the fastest pace in a decade. The deficits are not an emer­gency re­sponse to a sud­den down­turn. They are built into the sys­tem. That is wor­ry­ing – for three rea­sons.

First, across Europe, gov­ern­ments are liv­ing way be­yond their means. Those deficits are not cop­ing with a sud­den emer­gency, and they are not pay­ing for in­vest­ment that will help them grow faster in the fu­ture. The most per­sis­tent deficits are in so­cial se­cu­rity schemes (and many would be even worse if pen­sion li­a­bil­i­ties were prop­erly ac­counted for). Is that sus­tain­able in­def­i­nitely? It takes heroic faith in fi­nance min­istries and cen­tral banks to be­lieve it is.

Next, even though economies have mostly re­cov­ered from the crash, the deficits are still pil­ing up, with no plan for pay­ing them back. If you look at debt-to-GDP ra­tios, they are spi­ralling out of con­trol as well. For the EU as a whole, the ra­tio stands at 89pc. Greece is on an alarm­ing 176pc of GDP, while Italy is on 137pc and France and Spain are just a frac­tion un­der 100pc. When are they go­ing to start to be re­duced? Right now, the an­swer is sim­ple. Never.

Fi­nally, gov­ern­ments have run out of room for any kind of fis­cal boost when there is an­other re­ces­sion. The econ­omy will in­evitably turn down at some point, and there could be a ma­jor crash. When it hap­pens, you’d hope the gov­ern­ment could re­spond with in­creased spend­ing. But it can’t do that if it is al­ready locked into per­ma­nent deficits.

From now un­til the end of this year, most of Europe will be liv­ing on tick. Sure, that is sus­tain­able right now. The mar­kets are be­nign, and the Euro­pean Cen­tral Bank is still buy­ing gov­ern­ment bonds by the cart­load. But sooner or later, that debt will catch up with them – and that means Nov 7 was a far more sig­nif­i­cant mile­stone than it may have ap­peared on the day.

‘Coun­tries have run out of room for any fis­cal boost dur­ing the next re­ces­sion’

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