Confidence in the UK economy and the handling of austerity plans to bring Britain back from the brink is being called into question, after the autumn statement and the updated fiscal and economic projections from the Office for Budget Responsibility (OBR) revealed the extent of the budgetary challenge facing the country.
The UK’s chancellor of the exchequer George Osborne revealed that Britain would face another five years of austerity measures and that the UK economy will only grow by less than 1% over 2011 and 2012. However, he debunked the idea that Britain would enter another recession:
"The central forecast we publish today from the independent Office for Budget Responsibility does not predict a recession here in Britain.
But they have, unsurprisingly, revised down their short-term growth prospects for our country, for Europe and for the world.
They expect GDP in Britain to grow this year by 0.9% – and by 0.7% next year.
They then forecast 2.1% growth in 2013; 2.7% in 2014.
Followed by 3% in 2015 and 3% again in 2016
In 2009/10, the last government was borrowing £156 billion a year. During the first year of this government, that fell to £137 billion. This year the OBR expect it to fall again to £127 billion.
Then £120 billion next year; followed by £100 billion in 2013/14; £79 billion in 2014/15.
Then £53 billion in 2015/16; and £24 billion a year by 2016/17.
Subsequently, Osborne had to admit that there was “no chance in eliminating the current structural deficit before the 2015 election”:
"However, I can report that because of the lower market interest rates we have secured for Britain, debt interest payments over the Parliament are forecast to be £22 billion less than predicted.
The House might also like to know – given the economic events described by the Office for Budget Responsibility – what would have happened to borrowing without the action this Government has taken.
The Treasury today estimates that borrowing by 2014/15 would have been running at well over one hundred billion a year – and Britain would have borrowed an additional £100 billion in total over the period.
If we had pursued that path, we would now be in the centre of the sovereign debt storm."
Ratings agencies, such as Fitch, have responded to the statement:
Fitch's initial assessment is that the policy response does demonstrate a continuing commitment to placing UK public finances on a sustainable path, and the adoption of more realistic economic forecasts enhances the credibility of the consolidation effort, while the important target of reducing the public debt burden from 2015/2016 remains intact.
However, the deterioration in the economic and fiscal outlook implies that net public sector debt will peak at 78% of GDP compared to the previous OBR forecast of 70% in 2014/15. On a broader measure of government debt used by Fitch in international comparisons, the UK government will become the most indebted of any AAA-rated sovereign with the exception of the US (AAA/negative outlook). UK government debt is on this measure projected by the OBR to peak at 94% of GDP and compares with Fitch projections for Germany and France of 83% and 92% respectively.
As with some other major AAA-rated sovereigns, unless off-setting measures were adopted, the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its AAA status has largely been exhausted.
Tough times, call for tough measures and with it one of the largest strikes in recent history.
Echoing the 1979 "winter of discontent" strikes over the Labour government's pay policy and the 1985 miner's strike under the Conservative Party ruling, around two million people are on strike across the country.
According to data, interviews and reports, public sector workers, which are members of 29 trade unions, are on strike because the government wants them to:
- Pay more into their pensions
- Work for longer
- Accept a pension based on a career average salary, rather than the current final salary arrangement which many are on
The government says the cost of funding public sector pensions is "unsustainable" as people are living longer.
Unions say the proposals will leave members paying more and working longer for less.
However, at a time where the UK economy and the rest of the eurozone faces sovereign debt contagion, the public sector is a key area to pare down and skim capital.
Similarly, when it came to Greece's second bailout package, the heavy negotiations meant that if Greece accepted a 50% debt write-off and another €100 billion, then the following concessions would need to be made:
- wage cuts for public sector workers to 60%
- 30,000 public sector workers to be suspended
- a new pay and promotion system for 700,000 civil servants to be installed
- pensions and lump-sum retirement pay are to be cut alongside higher retirement ages and a lowering
of the tax-free threshold to €5,000 a year
As the UK faces this debt storm", the UK government faces a quandary as it tries to bring down debt but stimulate the economy at the same time, and mainly that means more jobs.
So, it is no surprise that as the country is experiencing a similar 1980s-type strike, the government has also been employing similar Thatcherite measures to stimulate the job sector.
This month, Osborne revealed that the government would double the discount for purchase for millions of council tenants to buy their homes, which, in turn, the government hopes will re-invigorate the housing sector.
In tandem, the UK prime minister David Cameron announced that the government plans to build 450,000 affordable homes" between now and 2015, which will also open up more jobs in the construction industry.
To be continued...
- Euromoney Skew Blog