Monday, February 9

On The UK Deficit

The IMF thinks that the UK will have the largest budget deficit, excluding the effects of the economic cycle, in Europe in 2015 putting Britain's finances in worse shape, in this regard, than Portugal, Italy, Ireland, Greece or Spain. Among the major developed nations only Japan is running a bigger deficit than the UK.

So far, the public sector deficit has not deterred investors from buying UK govt bonds, which have soared to record levels, buoyed by low inflation and a perception that the UK is a safe haven underpinned by an aggressive deficit reduction programme. Since the financial crisis, the UK has effected the seventh-largest fiscal consolidation among 31 advanced economies tracked by the IMF. 

The success of the reduction programme has, however, been blunted by a lopsided economic recovery with falling wages and lower-than expected tax revenues.

The remaining consolidation will therefore likely come in the next parliament via spending cuts. The IFS estimates that public spending, as a share of national income, may fall to its lowest level since 1948 resulting in 900,000 public-sector job losses reducing the government workforce to its lowest point since 1971 (Deloittes).

Enter the May elections: to reach its targets, Conservatives would cut spending by 6.7% from 2015 to 2019; Labour could hit its less demanding goals by cutting 1.4%. According to the Financial Times, this implies that, by 2019-20, Labour will spend £27 billion a year more than the Conservatives.

Get out the vote.