Blowing the Whistle on UK 'Austerity'-How Britain Is Using Spin to Con the Bond Markets
Tullett Prebon Research by Dr Tim Morgan
(firmenpresse) - LONDON, UNITED KINGDOM -- (Marketwire) -- 05/15/12 --
If there is anything on which Britain's political factions agree, it is the reality of fiscal austerity.
Led by shadow chancellor Ed Balls (and echoed by public sector lobbying interests), the Labour opposition accuses the coalition administration of creating economic malaise by cutting public expenditures 'too far and too fast'.
Far from denying the toughness of its spending policies, the government retorts that the programme of painful austerity is essential if the UK is to defend its triple-A 'safe haven' status, and thereby keep interest rates low.
This narrative masks an inconvenient truth which policymakers of all persuasions will do almost anything to hide. This inconvenient truth is that, far from being 'slashed', public expenditures have hardly been reduced at all. Rather, government is relying on increased taxes to reduce the deficit.
Official Treasury numbers show that real public spending was just GBP 8bn (1.1%) lower in 2011-12 than in 2009-10. This number, modest in itself, needs to be set against the big (GBP 31bn, or 4.6%) increase in spending during Labour's last year in office. At GBP 681bn, public expenditures in 2011-12 were GBP 23bn (3.4%) higher than in 2008-09 (GBP 659bn)(1).
(1)Unless otherwise stated, all spending data are expressed at constant 2010-2011 values.
Whether it comes from the government or from its critics, then, the tale of 'big' cuts in public spending is a bare-faced deception.
Sooner or later - with the probabilities strongly favouring 'sooner' - the Big Lie at the heart of the British fiscal stance is likely to be exposed. Some commentators may already be beginning to smell, if not exactly a rat, then at least a very large and feral mouse.
Investors should be asking themselves two questions:
We conclude that Britain has not cut overall real public spending in any significant way, and looks highly unlikely to do so unless government strategy undergoes fundamental change. The modest progress that has been made on reducing the deficit has resulted almost entirely from higher rates of tax.
The government seems to believe that it can con the bond markets using the smoke-and-mirrors of largely illusory austerity. Longer term, this won't work - and neither should it.
Nailing the Big Lie - phoney austerity
Britain's 'Big Lie' about public spending austerity is easily nailed.
In 2008-09 - and expressed at constant 2010-11 values - the then-government spent GBP 659bn. In 2009-10, reflecting a combination of 'automatic stabiliser' costs and pre-election largesse, public expenditures increased by a real-terms 4.6%, or GBP 31bn, to GBP 689bn.
During the coalition government's first year in office (2010-11), spending increased again, albeit by a fairly minimal GBP 2.4bn. Public spending did fall in 2011-12, but only by a pretty modest GBP 10.3bn, or 1.5% (see fig. 1).
What this means, in overall terms, is that real expenditures in 2011-12 were GBP 7.9bn (1.1%) lower than in 2009-10, but remained GBP 22.6bn (3.4%) higher than in 2008-09. Even if we accept the comparison with 2009-10 (and thus ignore the big increases in outlays during that pre-election year), the so-called 'savage' cuts in spending delivered by the coalition amount to just over 1% of total expenditures. Portraying this miniscule amount of spending restraint as anything other than marginal is mendacious in the extreme.
To be sure, the deficit has been reduced, from GBP 161bn (at 2010-11 values) in 2009-10 to GBP 123bn in 2011-12 (fig. 2).
But some very serious qualifications need to be made even over this seemingly-positive out-turn:
Measures of mendacity
The full scale of the 'fast one' that the UK has been trying to pull both on the markets and on the public is evident from fig. 3, which sets out the two- and three-year records to 2011-12.
Starting with the two-year period between 2009-10 and 2011-12:
Government, then, has mopped up most of the skimpy recovery in GDP for its own use, has made very modest spending cuts, and has added well over GBP 200bn to its debts.
Things are no less damning when measured over the three-year period between 2008-09 and 2011-12:
Over this timescale, spending is higher even though neither the economy nor the government's income has progressed in any meaningful way. It need hardly be added that public debt has increased sharply over this period.
Whether measured over a two- or a three-year timescale, then, the British state has defended its own spending, has mopped up most of any increase in GDP through higher taxes, and has kept on adding to its debt.
Presenting any of this as serious spending reduction - let alone as severe spending 'austerity' - is dishonest.
If the British government were able to change places with Capt. Edward Smith a century ago, the announcement to passengers would be roughly this:
"Yes, Titanic has indeed hit an iceberg, but we have not sunk, and the ship's head is still pointed towards New York. You can have complete faith in White Star Line".
It's high time that this mendacity was exposed for what it is. Government has done very little about its spending, has appropriated three-quarters of all gains in economic output for its own use, has carried on piling up debt - and has tried to pass all this off as 'responsible austerity'.
The motivation for government spin is obvious enough, of course. On the one hand, rises in market interest rates could be a disaster, given the extent to which British households are leveraged. On the other, implementing the real cuts required to back up a genuine austerity package have proved politically unpalatable.
It seems improbable that the bond markets (and the rating agencies) will continue to fall for this spin-job, and they are likely, sooner rather than later, to call the UK authorities to account.
Dr Tim Morgan
Global Head of Research
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TPSN039 Tuesday, May 15, 2012 / blowing the whistle on UK 'austerity'
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