Analysis: Longer-term dilemmas lie in wait

Parties face longer-term challenge
Parties face longer-term challenge

By Alex Stevenson

Those with a vague interest in following the state of Britain's coffers may be dimly aware we have a problem with debt. We don't.

Historically debt as a percentage of GDP remains below 50 per cent, about as low as it was at the end of the 19th century. We had an empire then, after all.

Since then it rocketed upwards, to around 175 per cent during the 1930s and then spiking at nearly 250 per cent in the post-war years.

It took three decades to slip back to present levels, which can broadly speaking be described as 'normal'.

The problem lies in the public finances - that is, the gap between the government's total spending and tax receipts.

These were last in line around the beginning of New Labour's second term in power. Since then total managed expenditure began to exceed public sector current receipts.

It was this time last year that a decisive break occurred. Tax receipts fell away to around 35 per cent of GDP, even as spending shot up to around 48 per cent. Britain is beginning to accumulate debt, and fast.

Something has to be done to rectify this problem, which wise economist heads tell us is not exactly ideal.

For now, the cost of borrowing is relatively low. But things can change quickly, as occurred in the early 1970s following the first oil shock.

Then there's the risk that a 'double-dip' recession could send tax receipts plummeting lower, making it much more difficult to restore the structural deficit.

The government expects a return to growth this quarter, with GDP expanding by around three per cent by mid-2011.

An alternative scenario sees economic stagnation persisting well into 2012. Lingering unemployment, low lending levels to business, government borrowing limits and the end of the monetary stimulus could all bring about this unpleasant possibility.

That's why the government has, at present, adopted a cautious timetable for adjusting the structural deficit, which in the 2009 Budget stood at 6.4 per cent.

It has previously planned to slowly increase the percentage of GDP clawed back to 6.5 per cent by 2017/18, taking the slow and steady middle road.

There are alternatives.

The Conservatives, for example, propose starting out on this arduous journey sooner. George Osborne has previously said the deficit would be sorted out by the end of the next parliament, in 2014/15.

Others, like the economist David Blanchflower, have proposed seeking to avoid having to begin this process until as late as possible - perhaps until 2012/13. An accelerated process would then take place.

Mervyn King, the governor of the Bank of England, views both these alternatives with concern.

"It is certainly true that if you eliminate the deficit too aggressively it will have an adverse consequence," he said.

"It is equally true that if you implement it insufficiently aggressively it will also have an adverse consequence."

Today's Pre-Budget Report will focus on the ways in which the government seeks to halve the public deficit in the next four years.

That is, literally, half the battle. Over the course of the next parliament the Conservatives and Labour will be confronting the bigger dilemmas which lie in wait.


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