Friday, July 18, 2008

More on UK Government Borrowing - The UK is Bankrupt

I have already posted once on this subject today, but thought I would add something more, as I have been giving some thought to the latest news on UK government borrowing. Having accurately predicted that there would be a crisis in government finances, I am still surprised by the speed of the collapse of the government's position.

As I pointed out in November, in 'A Funny View of Wealth', as the economy tipped into depression, government finances would suffer. It is both inevitable and obvious. As an economy turns down the sources of taxation shrink; VAT, income tax, corporation tax, stamp duty and so forth. At the same time costs will go up as unemployment rises and so forth. The situation at the moment is that the crisis in government finances has already started, but still at the point where unemployment is still in the early stages of the massive rise that will inevitably occur. In other words, if the government's financial position is this bad at this point, how bad can it get?

As I have mentioned, government will need to either borrow more, which will destroy confidence in the UK economy, or will require massive cuts in state spending. If it is the former, then the result will be destruction of confidence in the UK government's ability to manage the finances of the UK and the UK economy. If it is the latter, then there will be a strong downward lever on the economy (at least in the short to medium term).

I have been giving this some thought, and I am coming to a conclusion that it is going to become increasingly difficult for the government to borrow at all. I have detailed elsewhere that the £GB will continue to fall in value. I have argued that depression is looming. The government deficit it going to balloon. This makes lending to the UK government a very, very high risk venture.

My question is this; Will anyone want to continue to lend to the UK government under such circumstances?

I think that the answer, in the coming months, will be 'no'. I am not sure at what point this will occur, but I would guess that the turning point will come in the next six months or so. It is at this point that the government will really fall to pieces. The reason will be that, in the near future, the UK will be calling on the International Monetary Fund. Quite simply, with the huge risks in the UK economy, I simply do not believe that it is creditworthy, and others are going to come to the same conclusion.

Quite simply, the UK is bankrupt. Both consumers and government have borrowed more than they can afford.

It is like a household that has been borrowing to pay back previous borrowing. The household has been based in a good neighbourhood, and the household has continued to enjoy holidays, new cars, and all the luxuries of modern life. All this has been paid for with every increasing borrowing. Every month, more borrowing to pay back previous borrowing. Every month, the burden of debt has risen, but still the spending remains the same. Finally, the lenders will look at the household and notice that the amount of borrowing is creating a need for repayments that is exceeding earnings after expenditure. Do they throw good money after bad? The answer is, of course, 'no'. At some point they know that they must cut their losses. The UK is in a position where the earnings can not possibly meet the borrowing without severe cuts in expenditure, and there is only the prospect of decreased earning in the future requiring ever deeper cuts.

Time has run out on the UK economy. It is bankrupt. It will need to rely on the charity of the IMF. The IMF will demand that the UK government cuts expenditure. A wind of terrible change will have to blow through the UK economy.

Our analogous household will have to cut back, move into a poor neighbourhood, into a tiny run down house, and stop the spending on luxuries. The only spending the lenders will allow will be the necessities of life. It will be very tough. That is the price of reckless borrowing - having charitable lending bail you out, and biting the bullet of living within your means while you try to repay the debt. It is tragic.


  1. Another great article and absolutely on the money. I would be interested to hear who you think the (few) winners will be in the UK business world. What do Asians want to buy from the West? Should business to consumer (B2C) companies look at getting their websites fully translated into Chinese/Hindu?etc.? Could they tap into that emerging market, selling collectibles or other specialist items?

  2. Hi Mark

    Just thought I'd post this bit of irony.

    You said: "Time has run out on the UK economy. It is bankrupt. It will need to rely on the charity of the IMF. The IMF will demand that the UK government cuts expenditure."

    I'm sure you're right, but Gordon should remind them of the following as he holds out his upturned cap. From the Independent in March 2007

    "Gordon Brown received a pre-Budget boost yesterday as the International Monetary Fund upped its forecast for UK economic growth this year and described its performance as "impressive".

    The Washington-based lender now thinks the economy will expand by 2.9 per cent rather than the 2.75 per cent it predicted in December. That is in line with the 2.75 per cent to 3.25 per cent forecast the Chancellor set out in his pre-Budget report and above the 2.5 per cent average among City economists. "The near and medium-term outlook is for continued strong and stable growth with a return of inflation to target," the report said."

    (However, the IMF did also warn Gordon about increasing public spending, but it was a bit late by then, no?)


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