Listen to this article
This is an experimental feature. Give us your feedback. Thank you for your feedback.
What do you think?
Well, it was nice while it lasted. The pound has had a good run this year. Since December’s trough, sterling’s trade-weighted exchange rate has risen 9 per cent – a big move and one due a correction, or at least a pause. A review of Britain’s credit rating provided the excuse on Thursday. Sterling tumbled and gilts fell after Standard & Poor’s cut the UK’s debt outlook to negative, warning that the country’s ratio of debt to GDP could soon double to 100 per cent and then stay there.
There is, though, little new about such calculations. Sure, new data showed that government borrowing almost quintupled to £8.5bn in April compared with the same month the year before while tax receipts fell almost 10 per cent. But a high debt/GDP ratio need not be disastrous, as economic historians often point out. After all, British national debt was that high after the second world war, even if it was a period of austerity for those who lived through it. Sugar rationing was lifted only in 1953 and, to save foreign exchange, bananas were a rarity.
What does matter is how long UK debt continues to rise. For now, gilt spreads over German Bunds remain tighter than for any other big European economy. But at some point markets will demand compensation for the growing credit risk. The government to be formed after elections that are due at the latest in the middle of next year, therefore, needs to slow growth in the national debt and then reverse it. This will be a painful and unpopular task, as squabbling over the public purse always is. It is probably no accident that the governments of other European countries that have debt to GDP ratios of about 100 per cent, such as Italy, Greece and Belgium, are characterised by fractious, fragile and fleeting coalitions.
The Lex column is now on Twitter. To receive our daily line-up and links to Lex notes via Twitter, click here
Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.
If you have questions or comments, please e-mail email@example.com or call:
US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248