Wednesday, July 21

Why it might be time to go home

I’ve published several blog posts about the state of the UK economy since the global recession unfolded. The burgeoning Government deficit is the current economic topic de jour. For several years now the UK Government’s been spending at least £159.2 billion more each year than it earns from tax receipts and other income; roughly 11.5% of GDP. As the Government borrows more and more to cover the shortfall, total government has passed a staggering £1000 billion, more than 68% of GDP. Effectively, the Government’s debt has grown almost 75% in little more than two years.

Reducing the annual budget deficit, and reining in national debt, has become a primary focus of the new coalition Government. It released an emergency budget in late-June, warning of an unprecedented level of austerity in the years ahead. Tomorrow, every major Government department is submitting draft proposals on how they might cut their budget by 25%, and in a worst case scenario, by 40%. As this morning, the Treasury had yet to receive a single submission.

As the extent of planned spending cuts starts to crystalise commentators predict a rising tide of public sector protests, strikes and disruption. Job losses affecting more than 600,000 public sector workers are anticipated over the next two years, while the quality of service is expected to fall. The UK isn’t going to be a fun place to be this winter.

This misery will be further compounded by rising taxes including a 2.5% increase in VAT (as GST is called here) from January, a 10% rise in capital gain tax and the loss of tax breaks for middle and high income earners. The welfare state is also under attack as benefits are cut, additional means-testing is introduced and a number of social services vanish. As the chart below shows, currently the UK's unemployment is alsmot twice that of Australia. It will surely rise in the months ahead.

In short, the UK's in for a depressing period of austerity. Contrast this bleak picture with that of news stories coming from Australia; stories of economic growth, falling Government debt, falling unemployment and booming exports receipts. The charts above say really it all. I know where I’d rather be. It’s time to go home.

UPDATE - July 23
According to official data released today, the UK economy grew by a faster-than-expected 1.1% in the second quarter of the year. The BBC, says this was the nation's "fastest quarterly expansion since 2006." The result is rather impressive when you compare it to the 0.3% growth reported in the first three months of this year. The last time the UK had growth of more 1.1% in any quarter was in 1999. Watch for politicians on all sides to claim credit for these surprising results in the days ahead.

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