David Prosser: Greek lessons for Britain's next Chancellor of the Exchequer
Thursday 29 April 2010
Outlook: Let's be clear. Britain is not Greece. We may currently be running record budget deficits, but our total debt as a proportion of GDP is less than half that of the Greeks.
We retain our AAA credit rating. Our economy has exited recession. The average term before our debt has to be repaid is much longer. For all these reasons and more, our situation is not comparable to the ghastly crisis that faces the people of Greece.
So, were the likes of Vince Cable simply scaremongering when they raised the possibility yesterday of a similar crisis coming to the UK? Not entirely. Spain is not Greece either, yet it saw its credit rating downgraded yesterday – Standard & Poor's no longer thinks its economy will hit the targets that have been set for it.
One reason the Greeks find themselves in the position they do is because they have borrowed so much and now can't afford to pay it back. Another is that Greece has simply not been able to convince the markets – specifically, the investors in its bonds to whom it owes money, or those who might want to buy such debt – that even now it has a credible plan for getting the public finances under control.
First, the Greek government fibbed about how much money it actually owed. Then it gave commitments it could not possibly hope to keep and, finally, it agreed a deal with the International Monetary Fund and the European Union without any of the parties involved offering clear detail on what was planned.
Does this failure to offer a credible roadmap for deficit reduction sound at all familiar? The Institute for Fiscal Studies says the lack of credibility of all three political parties hoping to form the next government of this country can be costed quite precisely, thanks to their manifestos and public pronouncements on economic policy: in each case, it runs into tens of billions of pounds.
It is entirely rational to argue that Britain is far removed from Greece's parlous position. The trouble is that markets are often not rational. Sometimes, what investors on those markets believe at a given moment is more important than the facts, especially in the middle of a panic. And when you leave it to investors to fill in the blanks in your explanations, you run the risk that they'll get it wrong.
The lesson of Greece's crisis for Britain is not so much that debt can become unsustainable, though of course it can. More relevant to us is the example of how a problem not dealt with promptly and plainly can very quickly turn into a crisis that you no longer have any hope of controlling.
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