This maps out the real world as it is likely to happen. The stock market has - it seems - taken on an independent momentum and life of its own, divorced from this real world. The clock however moves inexorably on and the nightmare scenario of a rejection of Britain as a viable economy still threatens and has not gone away.
Conway here shows that on the Treasury’s own calculations the amount we are forced to spend on servicing our growing debts will double in two years from 5% to 10% of tax revenues. This is getting near the point where the state will not be able to borrow any more except at even greater interest rates.
Here I part company with those relaxing in the belief that the recession’s over and all will now sort itself out. The fact is that we are, as a nation. living on ‘printed money’ - through tax cuts (VAT cut to end in 2 1/2 months and car scrappage at about the same time) and through quantitative easing (QE) . Meanwhile the debts mount. This will not go on, and cannot. For if we continued down this path the taps would be turned off and we would then be plunged immediately into an Irish or Latvian situation. If on the other hand we stop QE and cut our spending we run the risk of returning recession.
The other imperative facing any government is that during this time of turmoil we have continued to borrow but we have not been able to do so with long-dated gilts. Instead they are going to fall due with a peak in 3 years time. There will come the horrendous moment when we shall seek to ‘roll-over’ this debt with mounting scepticism that it will be possible to do so. Incidentally 3 years ahead is the very time that respected economists forecast that we could move from deflation unto inflation.
This is Brown’s legacy. For we are in a worse state than other countries because in his engineered boom we continued to borrow unlike other countries who lowered their debt. This legacy is the nightmare Cameron, AND WE have to face.
Christina
TELEGRAPH
15.10.09
How bad will spending cuts get? Take a look at Latvia
Britain will not escape the savage spending cuts seen elsewhere in Europe, says Edmund Conway.
Allow me to paint you a picture of a country mired in chaos. The unions are in open revolt. Public sector workers have just stomached their biggest pay cuts in living memory; many face losing their homes. In a desperate attempt to bring the budget deficit back under control, ministers are considering slashing child benefit by a fifth – the biggest attack on the welfare state since it was set up in the first half of the 20th century. The government's popularity is at historical lows.
This is the state of affairs in one of our closest cultural and geographical neighbours. We should be watching closely, because what is happening in Ireland today is almost exactly what will happen in Britain tomorrow.
In the past few weeks, our politicians have begun setting out their embryonic plans for cutting spending – and we are all agreed that such cuts are necessary. But are we really aware of what lies ahead, of the cost in terms of human suffering, political stability and social unrest? I suspect not. To say that Britain will have to endure its toughest period of austerity since the war is significantly different to living through it.
But we won't be able to say we weren't warned. Across Europe – from Belgium to the Baltics – a whole suite of austerity laboratories have cropped up, as countries attempt to tackle deficits of unprecedented proportions. As well as Ireland, one might choose Iceland and Latvia as examples.
A third of teachers in Latvia have been laid off; the rest have endured savage salary cuts, leaving them barely above the minimum wage. Many have seen their pension entitlements slashed by 70 per cent; doctors and police officers face sacrificing a fifth of their pay. According to local reports, the state has cancelled some scheduled operations and hospitals are turning away some sick patients.
This is what happens when, quite simply, a country has no way of raising extra cash; when asset sales, such as those re-announced by Gordon Brown last week, come to their inevitable end; when tax revenues collapse catastrophically and the government has no option but to take a knife to the apparatus of the state.
Each country's route to this pretty pass is different. In the cases of Latvia and Iceland, the austerity measures were imposed by the International Monetary Fund after it bailed them out. In Ireland, it was the threat of such a bail-out, as markets started to balk at the country's debt, that sparked action. But whether inflicted by external forces or self-imposed, the cuts are unavoidable.
There is a rule of thumb among those whose job it is to rate a country's creditworthiness: that once the interest payments on its debt exceed 12.5 per cent of tax revenues, it is heading for the point of no return – in other words, getting into such a state that it will have to be bailed out. The relevant level of debt interest when Britain was last rescued by the IMF in the late 1970s, was just over 12 per cent.
In a couple of years, according to the Treasury's internal calculations, around 10p in every pound of tax we pay will go straight to servicing debt interest, compared with less than 5p at the moment. This time around, the repayment burden is soaring, while actual interest rates are at low levels – even a small increase in interest rates could push Britain's debt beyond critical mass.
We know that the cuts the Conservatives mapped out last week – to raise the retirement age and freeze public-sector pay – are only a start, and are not radical enough. Their proposals would cut the long-term deficit by around £7 billion a year (assuming that you believe their sums), and come on top of the Government's plans to reduce it by £14 billion. But the total size of the hole that needs eventually to be filled is closer to £90 billion.
Some, including Vince Cable, have had a go at sketching out how to plug the gap: their conclusion is that major projects such as Trident and Crossrail will have to go. But again, these only get us so far.
The lesson from Ireland, Latvia and elsewhere is that in the end the only choice is either to raise taxes or cut public sector services and jobs.
Further, whether it manifests itself in spending cuts or tax increases, this fiscal onslaught will almost certainly mean, at best, an insipid economic recovery, at worst, a further dive into recession.
Deflation, not inflation, will continue to pose a major risk to the British economy – however much stimulus is pumped into the economy by the Bank of England, in the form of low interest rates and quantitative easing, it is almost inconceivable that in the face of a budget bonfire the public will go out and spend heavily.
All in all, it makes for an unpalatable future, but it is one that David Cameron and George Osborne can do nothing to avoid. Their teams, consulting with Treasury mandarins as they prepare for office, are fast realising that what they face is every incoming government's nightmare
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