Ben Chu: The golden rule is a distant memory. Now we're flying blind

Share
Related Topics

The course of this economic crisis has been full of unexpected twists. But yesterday's revelation of falling Treasury tax receipts and rising government borrowing was not one of them. Tax revenues always decline in a recession as economic activity declines. And the Chancellor, Alistair Darling, made it clear in his pre-Budget report last October that the Government would respond to the shortfall by increasing public borrowing. The important question is whether Britain's public finances will be able to absorb these twin shocks. The answer is ambiguous.

Britain's national debt is now approaching 50 per cent of our annual economic output. The good news is that, while this breaks Gordon Brown's golden rule on public debt levels, it is nothing special compared with the liabilities of other G7 nations. The United States' public debt is more than 60 per cent of GDP. In France it is 64 per cent. Germany's debt is 63 per cent of its output. We have some room for manoeuvre.

Yet Britain plans to borrow more annually (8 per cent of GDP in the tax year 2009-10) than most of its peers. Throw in the Treasury's longstanding reliance on the now diminishing tax receipts of our financial services, and the potential need to take on the vast liabilities of our failed banks, and you have an ominous picture.

Some have conjured up a nightmare scenario of overseas investors refusing to buy UK government debt at present prices and pushing up borrowing costs for the Government. This would put Britain into a spiral of debt and perhaps even force the Government to seek cash from the International Monetary Fund to pay its creditors.

But there is another nightmare scenario in which the Government does not borrow too much, but too little. If ministers fail to take up enough of the slack in the economy by increasing public spending to pay for a fiscal stimulus, output could shrink still more dramatically. This could potentially create an unprecedented surge in unemployment. History teaches us that political crisis and a self-defeating retreat into protectionism become more likely in such circumstances.

So will the world end in the fire of national bankruptcy, or the ice of collapsing output and massive joblessness? The Government and the Bank of England have the responsibility of weighing up the risk and likelihood of each scenario. But the scary truth is that they are flying blind because we have never been in a synchronised global downturn on this scale before. In the end, our leaders will pay (or save) our money and take their choice. Pleasant dreams.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

SAP Assessor

£26000 Per Annum: The Green Recruitment Company: Job Title: SAP Assessor Job T...

SEN Teacher

Negotiable: Randstad Education Plymouth: SEN Jobs Available Devon

Infrastructure Lead, (Trading, VCE, Converged, Hyper V)

£600 - £900 per day: Harrington Starr: Infrastructure Lead, (Trading infrastru...

Software Solution Technician - Peterborough - up to £21,000

£20000 - £21000 per annum + Training: Ashdown Group: Graduate Software Solutio...

Day In a Page

Read Next
 

Daily catch-up: eurogloom, Ed in Red and Cameron's Wilsonian U-turn on control orders

John Rentoul
'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering