Britain’s pint-sized deficit
The drive to close the purported £50bn gap in Britain’s public finances is being treated like a national emergency. It is the reason for Rishi Sunak to absent himself from the Cop27 climate change summit overlooking the Red Sea. And George Osborne, now an investment banker, has been called in by his erstwhile colleague, current Chancellor Jeremy hunt, to advise on his speciality of austerity economics.
It is not precisely clear why all of this is necessary, especially as hunt has reversed most of the disparaged Truss-Kwarteng growth revolution.
But no one wants to take another risk with sterling, the gilts market and the nation’s pensions and fixed rate mortgages.
Yet we need to keep all of this in some kind of global perspective.
As this paper has pointed out, the International Monetary Fund’s (IMF) fiscal monitor shows Britain’s debt to national output (GDP) ratio to be in remarkably good shape compared with our G7 cohorts, with a lower number than all bar Germany.
The naysayers insist it is about the trend of debt (also improving according to the IMF numbers) and not the current static state. But as far as one can tell, Italy et al have no grand plan involving cuts.
Indeed, the new Italian government of Giorgia Meloni is due for a staged £232bn eU bailout if it meets reform targets.
The worry about UK frugality is that it might hurt the vulnerable at a time when the war in Ukraine is in danger of spinning into new strategic territory.
The IMF insists it is better if interest rates and fiscal policy are working in the same direction. But the outcome of such a double whammy is a deep recession.
And the only reason this seems tolerable now is because in at least four of the top economies – the US, Japan, Germany and the UK – unemployment is not a problem.
There doesn’t seem to be a strong risk of the famous Saatchi slogan of ‘Britain isn’t working’ making an immediate comeback.
The puzzle is that, in current global terms, the black hole in the UK’s finances looks a mere bagatelle. It was the late US Senator everett Dirksen who reportedly said ‘a billion here and a billion there’ and soon ‘you are talking real money’.
In the second decade of the 21st century this could be adapted to trillions.
President Joe Biden’s Inflation Reduction Act is a $2trillion giveaway to the States with some adjustments around taxation of the super wealthy tacked on.
his magnanimous forgiving of student loans, sold to the public as cost-free, has been assessed by the Congressional Budget Office as a $400bn giveaway.
WhO can forget that among Biden’s first fiscal triumphs was to embrace a measure devised by the Trump administration which dropped $1.9trillion of helicopter money on every person with a social security number in the US.
Just think of overnight events. In a flash, some $200bn (about a quarter of the gap in Britain’s public finances) was wiped off the $1.1trillion market value of Amazon shares in a moment. One might ask what does this have to do with British public finances? Well not a great deal, other than to illustrate how in global terms – and it was international markets which turned against the pound and gilts – Britain’s budgetary hole is paltry.
The £50bn, based on a slowing economy, is a worst-case scenario.
One of the surprising developments since August, when Labour was screaming for a cap on energy prices, is that the wholesale gas price has reversed in spite of the closure of the Nord Stream 1 gas pipeline which connects Russia to Germany.
eU data shows that the price per megawatt hour of gas in latest trading is €100 (£86) which compares with €339 (£292) in August.
Latest reports from National Grid show that, in the UK, the average gas price dropped 60pc in the week to October 23.
Many long-term gas contracts are hedged so that it takes time for market price changes to reach customers.
The cost to the exchequer of the muchdebated and truncated energy Price Guarantee is vanishing before our eyes – lowering the burden on the public finances.
My concern is a government, frightened by the Liz Truss effect, will overdo the hair shirt.
That will unleash unnecessary misery and stymie growth and enterprise.