The OECD published its Economic Outlook on Wednesday. If you are too tight-fisted to buy it you can read it online by clicking this image:
There’s plenty of interesting stuff in there but, as it’s something I haven’t written about for a while, let’s start with the public debt comparisons.
My graph from last time I looked at this has done the rounds on the interweb. I see it popping up in all sorts of places. So I decided to update it. This time, as the OECD report has figures which go further back and further forward, we can look at the debt over a longer period of time. Here, then, is a graph of government debt for the G7 economies against which we usually compare ourselves. I have used gross rather than net debt as the OECD says the figures are better for comparison and it’s the comparison that is the point of this post. Once again, I have left Japan out as its debt level is bonkers and it would mess up the whole graph.
2004-2012 with projection to 2014
Source: OECD Economic Outlook
This clearly shows the impact of the financial crisis on Britain’s economy and fiscal position. In 2004, Canada, France, Germany and the USA had debts of just below 70 percent. The UK’s was around 44 percent. That was pretty much the position until 2007. Then came the banking crash. Every economy’s debt went up but the UK’s rose faster than most. Having started from a much lower level, Britain’s debt to GDP level is now similar to the USA’s and not far short of France’s. The OECD predicts the UK’s debt ratio will overtake America’s by 2014. In short, then, all the major economies had a good kicking from the financial crisis but Britain had more of a kicking than most.
Why should this be? Well our bank bailouts didn’t help but the main cause, as this graph from the IMF’s Regional Economic Outlook shows, was a catastrophic collapse in revenues.
Financial services drove our economic boom and paid a lot of our taxes. When it crashed we suffered a double-whammy. A major part of our economy disappeared and it also happened to be the bit that needed bailing out. It is very unlikely that financial services will deliver the same growth, and taxes, as it did in the past and the bailed out banks are will probably be a millstone around our necks for some time yet.
But it’s also interesting to look at what has happened over the last two years. When I looked at this in 2011, the OECD were predicting UK government debt to be 93 percent of GDP in 2012. According to their most recent calculations, it was 104 percent. Britain’s debt has turned out to be higher than most people predicted. The government’s forecasts were revised by an extra £103bn in the three months before the budget.
It’s also worth remembering that there are two parts to a debt-to-GDP calculation. It can go up because debt goes up and because GDP goes down (which is what happened in 2009). The rapid rise in the UK’s debt is a reflection of its low growth as well as its high debt.
Compare this with the US, which has kept on pumping money into its economy to a point where its level of public spending will soon converge with ours. As you might expect, America’s debt-to-GDP level has kept on rising too but, by 2014, it will probably be lower than ours because its economy has grown much faster.
Now that’s not to say the UK would have done the same if George Osborne hadn’t turned the spending taps off so quickly. The collapse of one of our major industries was always going to hammer us and, as Chris says, there are some signs that the economy was running out of oomph anyway. That said, if we could have kept even some of the growth momentum we started to see in the dying days of the Labour years, that red line on the graph wouldn’t look quite so bad.
As Ed Conway noted yesterday, the longer-term projections in the OECD report are quite optimistic for the UK. It predicts that growth rates in the 2020s will outstrip those of Germany and the USA. Let’s hope it’s right. In the short-term, though, its forecast for our economy is crap. Consequently, it has the UK’s debt level overtaking that of France by the end of the decade! (A prediction even I view with some scepticism but that’s one for another day.)
Of course, there are arguments about how much of a problem government debt really is. If you have been following the Reinhart and Rogoff row you’ll know that opinion is divided to say the least. That’s a question I will return to at some point.
Regardless of whether or not (or how much) debt is a problem for governments, the sheer speed of the increase in the UK’s debt-to-GDP ratio after 2007 is a measure of how badly our economy was hit by the recession and the impact it has had on our government’s finances. If the OECD is right, we will recover sometime around 2020 but we will go into that decade nursing the wounds of the previous two. Better times will come but we still have a while to wait for them. It seems that those who predicted a lost decade will probably turn out to be right.