This is a stark warning of what’s ahead even if things go favourably. This is why the Bank of England’s decision on Thursday about whether to print more money (“QE”) and if so for how long is critical. We have no choice about reducing the fiscal derficit. If we do not the markets will at ruinous cost enforce it. That is the great divide between Labour and the Tories. Brown and Darling see the indefinite continuation of stimulus as a beneficial policy. The Tories see it as akin to borrowing on one credit card to pay off the final demand on another!
The FT’s piece on the same subject covers more countries and from this you can see how badly the USA and Britain compare. It suggests a target of reducing the debt-to-GDP ratio back down to 60 per cent over 10 years. This should be compared with the near 100% at present and 40% set by Brown as his own estimate of the target maximum.
To achieve this would - the IMF believes - entail ending all stimulus measures, freezing spending other than on health and pensions in real terms for a decade, sharply reducing growth in spending on health and pensions to keep this in line with output growth, and tax increases worth 3 percentage points of GDP. Notr much fun but some variant of this will have to happen.
Meanwhile the EU has had a rush of optimism about the British economy, with the Commission saying that in the next two years its growth will outstrip the rest of the EU. In the report which I have seen no rationale for this is given so I hesitate to circulate it until I can find that! I’m looking!
Christina
=================================
TELEGRAPH 4.11.09
UK interest costs 'equal to entire Transport bill'
The extra interest taxpayers will have to pay on the national debt in future years is equivalent to the entire Transport budget, the International Monetary Fund said in an unusual direct warning to Britain.
By Edmund Conway, Economics Editor
The IMF singled out the UK as being at significant risk from the threat of rising debt interest costs as it absorbs the effects of the financial and economic crisis. It said that the proportion of UK taxes that will go towards financing the national debt will, in five years' time, be double what it was just before the onset of the crisis.
It said: "Just the increase in interest spending in the United Kingdom is about twice annual outlays for environmental protection and is equivalent to annual spending on public transportation."
The surprising bluntness of the warning, which was contained in a broader document analysing the fiscal situation in a variety of countries, will be seen as a direct rebuke to Gordon Brown, who repeatedly ignored IMF advice in previous years to cut the deficit and leave the UK better-placed for future downturns.
In 2007 the proportion of tax revenues devoted to paying debt interest was just 4.2pc. This will increase to 8.3pc by 2014 as the UK's net debt rises from below 40pc of gross domestic product to almost 100pc, the Fund said.
Shadow Chancellor George Osborne said: "Now we're finding out what happens when a Labour Government loses control of the public finances. You end up spending more on the interest on your debts than on public services like transport. It's very unusual for the IMF to single a country out in this way, but it just shows the massive scale of Britain's debt crisis."
The Fund said that although the UK's debt servicing costs should not surpass levels seen in the 1980s, they are extremely sensitive to a sudden jump in interest rates. It said that if real interest rates rose merely to 5.1pc – their level in 1985 – it could push budget deficits higher by as much as 3.5pc of gross domestic product – more than £50bn a year in the UK. The warning underlines concerns about the UK's creditworthiness in the coming years. [And is a factor in whether or not the state can ‘roll-over’ its massive, increasing debts at the present rate of interest -cs]
==============================
FINANCIAL TIMES 4.11.09
Ten years of cuts and tax rises lie ahead, IMF says
By Krishna Guha in Washington
Sweeping spending cuts and tax increases will be required across the industrialised world over the next decade to bring public finances under control following the economic crisis, the International Monetary Fund warned yesterday.
The IMF projected that on current trends, even assuming some discretionary fiscal tightening next year, government debt in the advanced G20 economies would reach 118 per cent of gross domestic product in 2014.
It warned that such an increase would result in a big rise in government borrowing costs - with bond yields roughly 2 percentage points higher than they would otherwise have been.
In an interview with the Financial Times, Carlo Cottarelli, director of fiscal affairs at the IMF, acknowledged that there was no sign yet of rising bond yields but warned against assuming that current low rates would prevail in the future without big policy changes.
"The benign view is that the markets assume there will be fiscal adjustment. The alternative view is that markets react late and suddenly to changes in fundamentals," he said.
The IMF report came as Peter Orszag, the US White House budget director, gave a speech that suggested Barack Obama's administration intended to tighten fiscal policy by 1 to 2 percentage points of GDP over the medium term.
"Our current projections of 4 to 5 per cent of GDP in the out-years are well above the fiscally sustainable level of roughly 3 per cent," he said, adding: "We are currently considering a number of proposals to put our country back on firm fiscal footing."
The IMF analysis suggests that without a change of course all the leading economies except Germany will still be running large deficits in 2014, when the world economy is expected to be close to its potential level of output.
It puts the 2014 deficit - which is a rough proxy for the structural deficit - at 6.7 per cent of GDP in the US, 6.8 per cent in the UK, 8 per cent in Japan, 5.3 per cent in Italy and 5.2 per cent in France. The analysis suggests that interest payments on the increased stock of govern-ment debt will eat up a much larger share of tax revenues post-crisis than before the crisis - twice as much in the US and UK.
The fund said it would take spending cuts and tax increases equivalent to about 8 percentage points of GDP to bring the debt-to-GDP ratio back down to 60 per cent over a decade across the industrialised G20 nations as a whole.
A less ambitious plan to stabilise debt-to-GDP at 80 per cent would still require a 6.7 per cent adjustment, it said. These assessments are sensitive to increases in state borrowing costs relative to growth rates.
The IMF suggested a benchmark plan for an 8 percentage point turnround would involve allowing all stimulus measures to expire, freezing spending outside health and pensions in real terms for a decade, sharply reducing growth in spending on health and pensions to keep this in line with output growth, and tax increases worth 3 percentage points of GDP.
The IMF said "the adjustment needed in many advanced countries will be difficult but it is not unprecedented". However, it noted that adjustment "will be more challenging than in some past episodes because it will have to be undertaken in an environment of adverse demographics and potentially sluggish potential growth".
Posts
