‘Austerity’, UK Style

A Deficit Worse than Greece's?

UK chancellor of the exchequer, George Osborne:
a man with a very peculiar interpretation of 'fiscal austerity'

By Pater Tenebrarum

We have occasionally mocked the UK version of 'austerity' in the past, but have just come across a news item that clearly demands a reiteration of the mocking.

Morgan Stanley apparently reasons that the UK budget deficit could soon surpass that of Greece, which of course is currentlythe deadbeat in Europe.

According to a CNBC summary:

„Bad news for U.K. politicians clinging to the notion that the nation’s AAA debt rating indicates a clean bill of financial health. Morgan Stanley expects the British budget shortfall to earn the dubious distinction as Europe’s largest in 2013-14, surpassing even the deficit in troubled Greece.

The investment bank has reduced its UK growth forecasts for the coming fiscal year, leading to a deficit of just under eight percent of gross domestic product. “This would leave us with the highest projected European deficit — higher even than Greece, Spain, Ireland and Portugal,” it said in a research note.

Morgan Stanley’s deficit forecast is 25 percent worse than the projection of the U.K. Office for Budget Responsibility, although Morgan Stanley believe the OBR are likely to revise their predictions in December. Any significant reduction represents a risk of a downgrade to the U.K. much-heralded top investment grade.

Britain’s public sector borrowing widened slightly to 14.410 billion pounds last month, the highest for August since records began in 1993.  Over the first five months of the fiscal year, borrowing — excluding technical gains related to the transfer of Royal Mail assets to the Treasury — jumped by 22 percent to 59 billion pounds.

The U.K. are currently experiencing a double-dip recession, but the Conservative-led government has continued to champion spending cuts and has resisted changing course.“ (emphasis added)

Say what? They 'refuse to change course' on their 'program of spending cuts'? What spending cuts?

David Riley, the head of Global Sovereign Ratings at Fitch evidently has their number when he remarks:

“The coalition has somehow got itself into psychologically believing they are acting tough without actually doing so. Or they may have reached the erroneous conclusion that if you tell the electorate that things are going to be truly awful, you somehow earn their undying gratitude when things turn out to merely be slightly grim.” 

If the deficit begins to surpass that of euro area nations currently considered in severe debt trouble, one wonders if the situation will still be amenable to being defined as 'merely slightly grim'. 

The Printing Press Won't Help

One Andrew Lilico, Director and Principal at Europe Economics, meanwhile deftly dismissed the conceit that ownership of a printing press protects a nation forever from fiscal crisis if its government keeps running up an ever bigger tab:

“Where did anyone get that idea?! It's total nonsense, unsupported by even the most casual glance at history. Did printing our own currency prevent Britain from having a sovereign debt crisis in 1976, for example?” 

Indeed, 1976 has conveniently disappeared into the memory hole – but Britain was forced to ask for an IMF bailout that year. And it sure did own a printing press at the time – apparently chartalism didn't work as advertised on that occasion (chartalism is the crank monetary theory invented by Georg Friedrich Knapp that once brought down the monetary system of the Weimar Republic and has recently experienced a revival under the moniker 'Modern Monetary Theory', or MMT for short. Why do these cranks always insist their hoary inflationism is somehow 'new'?).

This incident should actually serve as a warning to those who insist that the size of the US deficit and public debt 'doesn't matter' just because interest rates on treasury debt happen to be very low at the moment. 

It is definitely not an 'invitation by the markets to spend more', as Paul Krugman often avers. It is rather an expression of the market's hope that the US government will be the last debtor left standing. This perception is definitely not unalterable – and experience shows that when market perceptions on allegedly 'risk free' assets change, they can change very quickly and violently.