TACKLING BRITAIN'S FISCAL DEBACLE

May 11, 2009

In 2010, according to the European Commission's latest forecasts, the United Kingdom will be spending 52.4 percent of gross domestic product and receiving just 38.7 percent of GDP in revenue.  It will, as a result, have a gigantic general government deficit of 13.8 percent of GDP.  Worse, the UK's cyclically-adjusted deficit will be 12.2 percent of GDP.  These are numbers one would expect in a time of war, says Martin Wolf, an associate editor and chief economics commentator at the Financial Times.

Consider:

  • Only five of the 27 members of the European Union (EU) are forecast to have a higher share of public spending in GDP than the United Kingdom in 2010: Sweden (57.3 percent); Denmark (57 percent); France (56.4 percent); Finland (54.3 percent); and Belgium (also 54.3 percent).
  • But only six EU members will have a lower revenue share than the UK: Romania (33.3 percent); Ireland (33.5 percent); Slovakia (34.1 percent); Lithuania (34.8 percent); Latvia (36.2 percent); and Spain (37.3 percent).
  • Just one member will have a bigger deficit than the United Kingdom: Ireland, on 15.6 percent.
  • The forecast deterioration in the UK's fiscal balance, of 11.1 percent of GDP between 2007 and 2010, is also the fourth largest in the European Union, after Ireland (15.8 percent), Latvia (13.2 percent) and Spain (12 percent).

How did this fiscal debacle occur?  The answer lies far more in spending, forecast to jump by an astounding 8.4 percent of GDP between 2007 and 2010, than revenue, forecast to shrink by a more modest 2.6 percent of GDP, explains Wolf.

What makes the United Kingdom's rise in government spending as a share of GDP puzzling is that the decline in GDP itself is not exceptional, says Wolf:

  • The Commission forecasts the decline of UK GDP at 3.8 percent this year, slightly less than for the EU and the eurozone, both of whose economies are expected to shrink by 4 percent.
  • In 2010, the UK economy is forecast to grow by .1 percent, again slightly better than the EU and the eurozone, both on -.1 percent.

The painful conclusion must be that the United Kingdom has lost control over public spending, says Wolf.  It has to get it back again.  Whether they like it or not, UK voters will have to elect a government willing to achieve this end.  Government solvency is at stake.

Source: Martin Wolf, "Tackling Britain's fiscal debacle," Financial Times, May 7, 2009.

 

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