Seven lost years for England

Following a budget update that confirms a horrific cocktail of sharply lower growth projections, higher debt and a longer recovery, it will take a remarkable turn for the UK to avoid a ratings downgrade.

UK Chancellor George Osborne has delivered an update on the budget and economy that confirms the UK as one of the weakest economies in the world, with seven lost years of economic growth.

The level of GDP will not return to the 2007 pre-crisis level until 2014, the budget deficit remains the one of the highest in the OECD, the peak level of government debt keeps being revised higher and the year at which it is projected to stabilise has again been pushed back, this time to 2016-17. It is a cocktail that will have the credit rating agencies circling like vultures, poised to cut the UK’s triple-A rating.

Osborne is forecasting UK GDP to contract 0.1 per cent in 2012, a sharp downward revision from the 0.8 per cent growth rate forecast in the March budget. The GDP projections have also been cut, with the government forecasting GDP growth of just 1.2 per cent in 2013 (revised down from 2 per cent) and 2 per cent in 2014. Recall that GDP fell 1.1 per cent in 2008, and fell a further 4.4 per cent in 2009, before edging up 2.1 per cent in 2010 and falling 0.7 per cent in 2011.

So poorly has the UK economy performed, that government borrowing is forecast to be a whopping 7.7 per cent of GDP in 2013 and 6.9 per cent of GDP in 2014, levels that continue to drive up the debt to GDP ratios. These horrible budget figures take account of the budget severity measures delivered over the past two years.

According to Osborne, net government debt will hit 79.9 per cent of GDP in 2016-17, which is almost 10 per cent of GDP higher than the peak projected two years ago when the then new Conservative-Liberal Democrat coalition government delivered its first budget. Osborne noted that "the tougher economic conditions mean that while our deficit is forecast to go on falling, instead of taking three years to get our debt falling, it's going to take four."

The debt level is being held lower by around £3.5 billion pounds from the government’s decision to sell licences to run the 4G mobile phone services.

Credit rating agency Fitch sounded a warning that the outlook for government debt was such that it was approaching "the upper limit that was consistent with the UK maintaining a triple-A rating” but that it will conduct a formal review of the rating after the 2013 budget. It would take a remarkable turn of events for the UK not to be downgraded.

The remarkable thing about the poor performance of the UK is that the debasement of its currency, via a 25 per cent depreciation and unprecedented quantitative easing from the Bank of England, has lessened the extent of the downturn. The export sector and super stimulatory monetary policy has prevented the UK from falling into an even deeper recession. Recall that for the likes of Greece and Spain, policy makers do not have the luxury of a flexible exchange rate or a self-managed central bank to print money as required.

The UK is now the eighth largest economy in the world and, despite the global market debacle of the past five years, remains a critical hub for global financial markets. As banking and finance undergoes its transformation, this source of support for the UK economy will continue to fade. In recent years, the UK has slipped behind Russia and Brazil in terms of its ranking in world GDP and within a decade or so, it likely to slip out of the top ten.

In per capita GDP terms, which is the more relevant measure for assessing living standards of the general population, the UK has slipped to number 22 and is only a small margin ahead of the likes of Spain, Cyprus, South Korea and New Zealand.

There are few reasons to be optimistic about the long-term future for the UK. Its economic plight saw it conscript Bank of Canada Governor and former Goldman Sachs staffer Mark Carney to the role of Governor of the Bank of England. It is not clear whether this reflects the quality of other internal candidates for the role or government desperation to recruit someone free of the policy baggage that has acted as a handbrake on progressive policy settings. Whatever the case, Carney has a massive challenge ahead to try to return the UK economy to any semblance of prosperity.

It might be harsh, but the UK is slowly running down the spoils of its plunder and exploitation of the colonies that kept it strong for so long. It has little industry to fall back on, it has been poorly managed for decades and its reliance on banking and seemingly on house price rises proved in fact to be a house of cards.

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