Wednesday, November 17, 2010

Can the United Kingdom help Ireland?

Update December 22, 2010

The United Kingdom announced today that their monthly budget deficit reached a record £23.3 billion, up from a previous record of £21.1 billion in December 2009 and £17.4 billion a year earlier.  It now appears that it is increasingly unlikely that the U.K. will meet its target of a £149 billion deficit for this fiscal year.  The marked increase in the deficit was mainly due to increased government spending, up 10.8 percent year on year.

Update November 21, 2010

Ireland has been forced to take an economic bail-out from the European Union and IMF totalling £77 billion after an emergency telephone conference this weekend.  British taxpayers will now pony up £7 billion as their share of the EU - IMF bailout.  
Next on the bailout list - Portugal.  

All in the name of saving the euro.

Original Article

Coverage of the Irish debt situation has been extensive over the past few days.  Ireland's banks desperately need a bailout after the country's real estate market suffered a major "readjustment".

Here's a quote from George Osborne, the United Kingdom’s Chancellor of the Exchequer from the Guardian today:

"Ireland is our closest neighbour – the only country with which we share a land border – it is in our interest their banking system is stable. Britain stands ready to support Ireland to bring stability." 

A very nice bit of support from one government to another don’t you think, especially for two nations that share a common border?

Let’s take a quick look at the United Kingdom’s own fiscal situation before we get that warm and cozy feeling all over, shall we?

On June 22nd, 2010, the coalition government of U.K. Prime Minister David Cameron released its emergency Budget.

The United Kingdom has reached the point of budgetary desperation. As it stands now, the United Kingdom is considered by many economists to be the most indebted nation in the world. Their national debt stands at nearly £924 billion. Their public sector net debt (as shown in the chart below) is projected to reach 74.4 percent of GDP by 2013 - 2014.  As it stood in 2009, according to the CIA World Factbook, the U.K.’s public debt as a percentage of GDP put them in 21st place in the world after such nations as Italy (115.8 percent – 6th place), Iceland (113.9 percent – 7th place), France (77.6 percent – 17th place) and Germany (73.2 percent – 19th place).

By comparison, the United States public debt to GDP ratio is 53.5 percent and Canada's is in the neighbourhood of 82.5 percent.  I realize that the debt to GDP numbers vary depending on the source used but I have consistently used numbers from the CIA World Factbook.

Here's a chart from the OECD showing just how bad their structural deficit as a percentage of potential GDP is compared to other nations:

It's a rather dire looking situation, isn't it?

One item that caught my eye in this time of HST implementation in Canada was the change to the UK's Value Added Tax (VAT). On January 4th, 2011, the tax will increase from its current level of 17.5% to 20%. What was particularly interesting was that this increase is expected to raise over £13.5 billion in a full year by 2014 - 2015. As well, the United Kingdom VAT rate still falls well short of the maximum of 25% allowed under European Union law.  Heaven help U.K. residents if it reaches that level as it has in Denmark and Norway.  Fortunately though, if you are a corporation, your tax rate will drop from 28 percent to 24 percent over the next 4 years.  Lucky you!

The United Kingdom's budget deficit is projected to be £148 billion for fiscal 2010 - 2011; it is hoped that the increased taxes (except corporate taxes) and reducing spending in the 2010 budget will help balance the budget by 2014 – 2015 (just in time for the next recession). In the budget of June 2010, the government anticipates expenditures of £44 billion on debt interest alone in 2010 - 2011; this is projected to rise to £67 billion by 2014 - 2015.  Should interest rates rise to historic norms, I suspect that this projection will also be tossed out the window.  The UK had been threatened with cuts to their credit rating by two rating agencies unless the new government made major changes to their tax and spend philosophy; the UK had not balanced their budget since 2002 - 2003 and their debt growth far exceeded their economic growth.  The Cameron government will also reduce spending by £32 billion per year by 2014 – 2015 in a further desperate attempt to balance its budget.  To put this into perspective, this small spending reduction compares to government spending of £697 billion in 2010 – 2011 and approximates what is currently budgeted for personal social services.

To keep track of public finances, the coalition government created the Office for Budget Responsibility (OBR) whose mission it is to independently assess the economy, control economic forecasts and make key judgments that drive official government economic projections most particularly for each Budget and Pre-Budget Report.  All this for only £1.75 million per annum!  Here's their fiscal forecast for the 2010 Budget showing that they expect the United Kingdom's finances to return to balance by 2014 - 2015 and surplus by 2015 - 2016 from a deficit of 5.3 percent of GDP in 2009 - 2010.  The OBR also assesses the probability of actually reaching the government's debt and deficit targets; their forecast shows that the government has a greater than 50 percent chance of actually meeting its targets for the period from 2014 to 2016 which, if you look at it realistically, means they have roughly a 50 - 50 chance of doing what they say they will do.  It may be just me, but that indicates to me that the forecast is relatively meaningless and that a coin toss would just as easily predict whether or not the government’s targets are met.  Here's the fan chart showing their borrowing as a percentage of GDP projections for the next few years.  Note how wide the fan becomes the further out in time they project data indicating growing uncertainty:

In conclusion, here is a direct quote from the 2010 Budget document showing U.K. residents just how serious the situation is:

“The fiscal challenge in the UK is, on some measures, larger than in any other advanced economy. In May, the International Monetary Fund (IMF) forecast that UK public borrowing would be the highest in the G20 in 2010; it is also estimated that the UK’s structural deficit will be the highest among all OECD countries and the 27 EU Member States. The rating agency Fitch has pointed out that “the rise in public debt ratios [in the UK] since 2008 is faster than for any other ‘AAA’-rated sovereign.”

And this is a government that has pledged to assist Ireland in its time of distress?  Nice sentiment but not entirely realistic.


  1. We should all incorporate our strawman.

  2. You are correct Anonymous. This debt is not real. Fractional reserve banking has created it and deserves to fall spectacularly. Default now. Let the banks fail and the Rothschilds go to the wall. Hell, let them smoke a last cigarette before we pull the trigger. Don't let your money sit in a bank. Buy 'things' with it that you will be able to use because this is going to get very messy.

  3. The UK needs to stop warmongering (it ain't no empire any more) and preferably cut its armed forces by at least 40pc. That would go some way to cutting a deficit, as well as having a bank levy that's a bit more than the proposed 2.5 bn. What about 10bn - better than cutting off all payments to many disabled people who have worked for years and PAID into the national insurance system. That's me and that's what they'll do next year.

    Get real - there are far better ways to cut than to attack the weakest

  4. Here are some things that I have had to learn the hard way:

    1) Your house is not an investment but a circumstance of lifestyle. The dwelling in which you live is the one that you can afford.

    2) No matter what their investments are, the best that most people can hope for is to break even. The stock market is no more a road to riches than a casino.

    3) The problem with the idea that you can raise revenues by cutting taxes is that people will always want another tax cut before revenues have been raised. Budgets are balanced by a combination of spending cuts in some areas and increased revenues in others.

    4) You can't fill pot holes, pick up the garbage, educate children in school, arrest bad guys, or fight fires without paying people to do these things. That's why we pay taxes.

    5) Americans expect too much from Washington and not enough from their state and local govenments. It's time for the states and the municipalities to pony up.

    6) There's nothing in life that's inevitable, except death and taxes. Unless you're a born-again Christian who denies the reality of death and is trying to deny the reality of taxes.

    7) Those who put guns before butter will eventually be too weak to hold a rifle. Rome ultimately fell because of incessant warfare, not the "perversions of the people."

    8) The United States of America was born through a government bailout. The federal government paid the debts of the 13 colonies from the War for Independence in return for ratifying the Constitution. The first law that Congress passed was an excise tax bill to pay this debt.

    Sometimes, the truth hurts.

  5. I'm Irish and what a sorry mess we're in. I used to be VERY pro-EU but not so these days - not since Lisbon. Anyway, I don't think the UK should bail us out, nor should the EU. Let it burn, let the house of cards fall where they may and then let us rebuild from there. Let the banks fall, let the euro fall if it comes to that, I always supported the euro, great idea I thought but it was folly. You cannot have monetary union without political union and the type of Germanocentric politicl union I see is not something I like.

    Let the banks here in Ireland fail. There are billions of taxpayers money within those banks, cover the small and medium Joe Soap deposits, possibly introduce an emergency measure whereby the State literally takes 5% of everyones deposits and starts a new, good, healthy, clean bank. We now need radical solutions and a little thinking outside the box otherwise we'll be boxed into debt for decades.

    It won't happen though I'm afraid - the status quo will continue until such time as things get out of control totally (as if they weren't already!) and we default - or restructure as the politicians would say. In a way we are only delaying the inevitable. Thanks for the help my British chums, it is of course apprecaited especially given our on and off history but that is money you may never see again so think twice. However as has been mentioned before should the banks here fall it could well be that the UK is open to huge loses and a negative knock on effect - given the liabilities of British banks in Ireland. Ah, what to do?!!!

  6. It would be interesting to see where the money has been spent over the past 10 years or so.

    The UK 2010 budget indicates that between NI, W and S the cost is #54.6B. What were those costs in 2001 without the new assemblies being established together with their spending habits?

    Climate Change: How much has addressing this none existent "problem" cost the tax payer and how much is yet to be spent? The implications of this alone on industry is significant. No such hinderance on the the BRIC' they chug merrily along with +5% growth rates.

    There are some fundamental issues and assumptions that need to be addressed when looking at where to save money. It’s not enough to trim. The previous administrations policy was based on ideology and fear rather than the science and which has proven to be built on lies and deceit. These policies need to be revisited and reversed.

  7. I'm a Canadian, living in the UK with a UK spouse. I sent all my money back to an account in Canada today. I've changed my diet and my expectations to survival. I don't think the banks want the Euro to survive. To quote an Irishman that I heard on the World Service this morning, 'We're being taken down the road to serfdom.'

  8. I guess if you read silly and ill-informed (see the IMF figures on national debts: the UK is still one of the lowest in the G7) blogs like this you are bound to get nervous Mr Canadian anonymous

  9. C Grant

    You are entitled to your opinion but if you look at source material for national debt (in particular debt vs. GDP), you will find that the numbers vary widely indicating to me that we, as the electorate, cannot trust those who we have put in charge of our central banks and our treasuries.

    I'm nervous and if you aren't, don't say that you weren't forewarned. Paper is just paper and zeros and ones residing on a central bank computer are just so much ether.

    Best of luck.