Friday, May 27, 2011

More Effects of Austerity in the UK

The outlook for the UK in the midst of its austerity program looks worse and worse. From the FT this morning:
Why the British economy is in very deep trouble

Here’s something for the Chancellor and the Office for Budget Responsibility (OBR) to chew on: a warning from Dr Tim Morgan, the global head of research at Tullett Prebon, that the deficit reduction plan won’t work and the UK is headed for a debt disaster.

Morgan says sectors that account for nearly 60 per cent of UK economic output are critically dependent on debt (public or private) and set to contract rather than expand. This will render economic growth implausible and means the burden of public and private debt will prove too heavy for the nation to carry:
Over the past decade, the British economy has been critically dependent on private borrowing and public spending. Now that these drivers have disappeared – private borrowing has evaporated, and the era of massive public spending expansion is over – the outlook for growth is exceptionally bleak.

Sectors which depend upon either private borrowing or public spending now account for at least 58% of economic output. These sectors are now set to contract rather than expand, which renders aggregate economic growth implausible. And, without growth, there may be no way of avoiding a debt disaster.

...Short of almost unthinkably drastic restructuring, there may be no way out of Britain’s low-growth, high-debt trap.
Gulp.
Not surprising, but still depressing.

2 comments:

  1. Alex Sinclair5:42 PM

    More debt is not the answer; the worst scenario is higher interest rates because no one wants to buy your debt.  There are plenty of examples in Europe and then there is NO EXIT.  Austerity is the only answer once you have borrowed too much.  What you are saying is also true in the United States all growth for some 10 years or more has come from debt instead of core growth.

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  2. Anonymous1:22 AM

    The solution to too much debt is not more debt.

    Almost all economists have trouble with that.

    Can anyone explain the difference between creating more medium of exchange with currency that has no bond attached and the demand deposits from debt?

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