As I write, I don’t know for sure who will be leading our new government. But I do know that I really don’t envy them. Why? Because for the next decade, running Britain will be about one thing: managing our deficit. With our national debt already at nearly 70% of GDP and rising to the tune of 12% of GDP a year, the person in charge will have a lot to do – if they have the strength to do it, which they may not.
Look at Greece. The third general strike in as many months this week meant that planes, trains and ferries stopped moving while most schools and hospitals shut down. Worse, three people died when protestors set fire to a bank in Athens. The austerity measures haven’t even begun to kick in and al-ready there’s blood on the streets.
The point is that raising taxes and cutting spending into a fiscal emergency is a political nightmare. Do it and you risk hideous unrest. Don’t do it and you risk bankruptcy. Still, for most governments, bank-ruptcy in a few years is a more attractive option than blood in the streets right away. So they take what GMO’s Edward Chancellor, writing in the FT, calls “the path of least political resistance”.
They keep spending and building up fiscal deficits. Then in the end they default. Odds are that that is what Greece will do in the end – unless the European Central Bank relents and allows much looser money and inflation to bail them out.
But what of us? Even now we still don’t really know what our new government plans to do about our deficit. None of the cuts or tax rises mentioned so far come anywhere near dealing with the scale of our problems. Research from economists Carmen Reinhart and Ken Rogoff shows that when a coun-try’s national debt hits about 90% of GDP – as ours will by 2011 – the trouble really starts. Then, eco-nomic growth stalls, as do tax revenues, making it ever-harder for governments to pay the interest on their loans. Defaults also tend to happen after a sharp run up in debt. So it isn’t reassuring, as Chan-cellor points out, to note that between 2007 and 2011 the UK’s debt will have risen by 44%.
That said, our troubles are unlikely to end in official default. As Russell Napier, who I interview this week, says, in countries that control their own currencies there are “more gentlemanly” ways of deal-ing with debt. You can “legitimately question” the ability of the Greeks to repay you in euros because they don’t get to print the euros. But you can’t question the ability of the UK to repay you in pounds: we can print what we need.
So there won’t be a technical default.
But what you probably can bet on is losing a great deal of purchasing power if you keep your money in cash or gilts over the next decade. Inflation will take care of that.