UK public finances

Listen to this article

00:00
00:00

Great Britain lies at the edge of the Gulf Stream. But it is not these warm waters that can make it seem like a banana republic. It is the state of UK public finances. Like many emerging markets in the past, the UK is in the throes of a combined banking crisis and deep recession. Alistair Darling, the chancellor, would like to boost government spending to meet those challenges. But he cannot open the taps – markets will not let him.

Last year, the budget deficit hit 6.3 per cent of gross domestic product. This year, borrowing is set to almost double to 12.4 per cent. That would be the highest level among Britain’s developed economy peers. It is also three times the percentage deficits of Argentina and Indonesia.

The British government’s biggest challenge is to avoid a funding crisis. So far, barring one failed gilt auction, that has not been a problem. Investor demand for “riskless” assets remains high. But there is a chance investors will run scared if they can see only red ink stretching into the future. Such fears are only compounded by worries that UK public finances may be structurally weak, given that the now smouldering financial services sector once accounted for an eighth of all tax revenues.

Trying to address such fears, Mr Darling has forecast the budget deficit will start to narrow from 2011, falling to 5.5 per cent in 2013. By then, net debt, including the costs of the bank bail-out, will also start to fall from a peak of 79 per cent of GDP. Yet, while welcome, such projections lack credibility. It is not the spending cuts or tax rises of Mr Darling’s budget that should be doubted. They can be executed with the stroke of a pen. It is his forecast that the UK economy, in spite of the worst recession in almost 80 years, will grow 1.25 per cent next year and 3.5 per cent the year after. This is crucial as higher growth translates into smaller budget deficits and lower debt. The International Monetary Fund disagrees. It expects the economy to shrink next year, not grow. So too, it seems, do investors. Wednesday’s rise in gilt yields may be a sign of steeper debt costs to come.

Wednesday’s rise in gilt yields may be a harbinger of more to come.

To e-mail the Lex team confidentially click here
OR
To post public comments click here

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.

Subscribe now

If you have questions or comments, please e-mail help@ft.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

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.