I wonder how many people have read as far as the long-term projections at the end of the OECD’s Economic Outlook. Ed Conway was one of the few to comment on them and he noticed a “whopping slab of good news for Britain”. The OECD forecasts an average growth rate of 2.6 percent for the period between 2018 and 2030. That would make Britain the boomiest country in the G7. I say boom but actually it’s only a return to the sort of growth we used to think of as normal. Set against the background of the previous decade, though, it will be a good enough reason to throw a party.
The reasons for the UK’s growth, says Conway, are its flexible labour market and its relatively high birth rate. People will no doubt praise Margaret Thatcher for the former but will they thank Tony Blair for the latter? After all, he let in all those pesky immigrants and they are the ones doing the most to push up the country’s birth rate.
Wherever the praise or blame goes, Britain will not face demographic problems on quite the same scale as some other advanced economies and, as a result, says the OECD, our economy will steam ahead of the others in the G7.
Annual real GDP growth, G7 countries
|Real GDP Growth
2012 – 2017
|Real GDP Growth
2018 – 2030
So everything’s going to be OK then is it?
Well, not quite. (I hear a general sigh: ‘Trust Rick to find the cloud wrapped around the silver lining.’)
The OECD also predicts that Britain’s debt will be the second highest in the G7 by 2020 and the second highest in the OECD by 2030. (Second to Japan, of course, which almost goes without saying.)
If I extend the graph I did in the previous post up to 2030, the results are startling.
Government gross debt as a percentage of GDP
2004-2012 with projection to 2030
Source: OECD Economic Outlook
The UK’s debt overtakes Italy’s somewhere around 2019. Despite relatively strong economic growth, this country’s debt remains stubbornly high throughout the 2020s.
This implies that, until the end of this decade, the UK will add to its debt at a faster rate than its economy grows. In other words, public spending will continue to outstrip revenue and the government will be forced to run a deficit. After that, the reduction in the debt-to GDP will still be relatively slow, even with the fastest growing GDP in the G7, suggesting that the UK government will continue to run a deficit for some time.
The grimness of these figures must surely be conclusive proof that few journalists have read to the back of the OECD report. As far as I can tell, there have been no ‘Britain to have higher debt than Italy by 2020’ headlines from the Britain-is-Bankrupt brigade.
I must say I’m slightly surprised by these projections. We know that our economy has taken a huge hit from the financial crisis and that, as a result, Britain has been running a higher deficit than most OECD countries. Even so, with an economy growing faster than most, you would expect the rising tax revenues to reduce this and the increase in GDP to bring our debt-to-GDP ratio down a lot faster. How can countries like Italy, which start with higher debts and have lower growth, bring those debt levels down so much more quickly than the UK? I can’t find anything in the OECD commentary to explain this but I’d welcome your thoughts.
If the OECD is even half-right, though, it will make the next couple of elections interesting. It is starting to look very much as though the next election might be a good one to lose. Weak growth, rising debt and some horrid tax and public spending decisions are not going to make the next government popular. It’s not hard to imagine the taunts: “This, from the prime minister who saw our debt overtake Italy’s….!”
The election after that might be a good one to win though. The pick up in growth will probably come too late to save the 2015 government’s bacon but whoever is elected in 2020 will reap the rewards. Growth will be strong or, at least, back to normal and the debt-to-GDP ratio will, at last, be coming down. The new prime minister could ride in on a new wave of growth and optimism. I expect some politicians are already scheming for such a scenario. The 2020 government will still face tough fiscal choices, of course, but dealing with such problems during a time of growth will be that bit easier. Whoever wins in 2020 could be well placed for 2025 too.