A little-noticed IMF report last week completely blows apart the Coalition's argument that we NEED to make these deep spending cuts immediately. The actual report is pretty hard to understand, but as the BBC economics editor summarises, the report states we have a 75% chance of successfully expanding our debt-to-GDP ratio by another 50% (bear in mind it's only increased by 35% over the last couple of years in the midst of a recession) without a vicious debt spiral - which realistically means we'd probably have room to carry on stimulating our economy for another couple of years, nevermind making these deep spending cuts. The report concludes that any comparisons to Greece, Spain, Italy or Japan are completely off the mark, and that we're even in a better position than the USA (who haven't even started seriously discussing spending cuts yet), who "only" have a 50% chance of successfully increasing their debt-to-GDP ratio by another 50%.

 

From Stephanie Flanders:

 

The interesting nuggets in these new academic papers - once you've managed to wade through them - aren't so much the forecasts for the UK but the comparison with other countries, notably the US.

 

One paper tries to measure "fiscal space" - how much room countries have to run up more debt, before the markets lose confidence in them, and their borrowing goes onto an explosive path. Predictably, the authors conclude that Greece, Spain, Italy, Japan and Portugal have little or no room for fiscal manoeuvre. The executive summary asserts that Ireland, Spain, the UK and the US are also "constrained" in the amount of debt they can run up over the next few years.

 

Again, that sounds bad. Until you actually look at the research. It turns out that, yes, Greece, Japan and Italy are on very thin ice. According to the authors' modelling, there's only a 6% chance that Greece can take on significantly more debt in the next few years, without something very bad happening. There's a less than one in five chance that Italy has any room to borrow more.

 

But it turns out that the UK is in much better shape. What the authors mean when they say we're "constrained" is that they think there's very little chance that the UK or the US could afford to raise their debt stock by another 100% of GDP from where we are now. But that's quite a lot of fiscal space to play with, even taking into account the rising cost of health care and pensions, which the IMF is understandably concerned about. After all, the "unprecedented in peacetime" rise in debt in the past few years has been on the order of 35% of GDP - not 100%.

 

In fact, the study concludes that there's a more than 75% chance that the UK has room to increase its debt stock by another 50% of GDP before getting into a vicious debt spiral. Yes, you read that right - it thinks there's a good chance our debt could go to 140% of GDP without us getting into an explosive debt spiral (though by that time I suspect we would have long ago lost our AAA rating). In this we are in better shape than the US, where there's only a 50/50 chance they could sustainably raise their debt stock by that much.

 

Of course, all of this is built on a lot of speculative assumptions about interest rates and the likely future behaviour of governments and markets. No-one's suggesting that the chancellor - or a would-be chancellor - should put these estimates to the test. But, if nothing else, it shows how far even the IMF thinks we are from some of the doomsday scenarios you hear on the subject of government debt.

 

One of the other papers makes the point in a more straightforward way. It's called "Default in Today's Advanced Economics: Unnecessary, Undesirable and Unlikely" (the clue's in the title).

 

It says that the risk of a sovereign debt restructuring - or default - is being "significantly overestimated" by the markets, largely because people are overstating the benefits that countries like Portugal or Ireland would actually get from a restructuring.

 

Why? Because people are forgetting that the big burden these countries face isn't the cost of servicing the borrowing, but the borrowing itself. Of the 10 advanced economies with the biggest deficit problems, interest payments on debt now average around 3% of GDP. The real problem is the continuing gap between spending and revenues, even before they start thinking about servicing their debt (what economists call the "primary deficit").

 

The average primary deficit in these economies is more than 7% of GDP. As I've mentioned before, in the context of Greece, if a country has a large primary deficit it makes less sense to default or restructure the debt, because even if they stop paying any interest at all on your debt, they will still have to find a way to cover the ongoing gap between your core spending and tax revenues. And if you've just reneged on your promises you're not going to find the market very willing to plug the hole.

 

The authors take a long hard look at the debt and interest rate dynamics facing different countries over the next few years. Once again, the surprising news is that Britain comes out relatively well.

 

True, our primary deficit - before interest payments - is up there with the worst of them: 8.8% of GDP, compared to that average figure of 7%. But when it comes to bringing it down, it turns out we have some powerful forces operating in our favour.

 

For example, unlike nearly every other advanced economy, the IMF expects the interest rate we pay on our debt to be lower than our rate of economic growth over the next few years. When it comes to government debt ratios, that is very important: it means we don't actually have to deliver a primary surplus - a surplus before interest servicing costs - in order to stabilise our debt.

 

In fact, the IMF thinks the UK could run a deficit, before interest costs, of 0.7% of GDP between 2011 and 2015 and still stabilise the debt. On average, the other advanced economies in this study have to run a primary surplus of 1 % of GDP to achieve the same thing. (It's a reflection of Greece's plight that it needs a primary surplus of 5.5 % of GDP to stop its debt ratio going up.)

 

http://www.bbc.co.uk/blogs/thereporters/st..._good_news.html

 

The big factor in our favour is that the vast majority of our debt doesn't "mature" for a very long time, which basically means we don't have to pay it back for, on average, about 15 years. As this table shows:

 

http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/imf_table3.jpg

 

It means, that, next year, the UK will only need to raise 13% of its GDP to cover its debt payments - below the average of 20% and well below Japan's 41%.

 

 

So, let's refresh: this Coalition's big arguments in favour of big spending cuts were it would be done in a "progressive" way, that credit agency Moody's would downgrade us, and that the IMF would have to bail us out. Now, we've had the IFS judging the coalition "profoundly regressive", Moody's have said we're in danger of losing our AAA rating due to "overly aggressive cuts", and the IMF says we're in a good position on our debt on the crucial measures. And people still don't think this Coalition is ideologically-driven?

I dont understand any of this :(

I dont understand any of this :(

 

I'll put it simply: George Osborne is lying.

Dont all people in power lie though? Politicians especially. Meh Im used to it

Dont all people in power lie though? Politicians especially. Meh Im used to it

What a wonderfully developed line of thinking. No, for the record, not all politicians lie. And they rarely tend to lie when they're going to be enforcing the sorts of measures that affect millions - and when they get caught out, they tend to get pilloried (take Iraq, for one).

Most of them lie, or bend the truth Tyron! Its obvious

Most of them lie, or bend the truth Tyron! Its obvious

 

They don't usually lie as blatantly as this government is doing. I don't remember a government ever being flatly contradicted by the IFS before.

And the lies tend to be more along the lines of 'I did not have sexual relations with that woman' rather than stuff that actually MATTERS.

Most of them lie, or bend the truth Tyron! Its obvious

There's a big difference between lying and bending the truth.

I'll put it simply: George Osborne is lying.

Here here!

 

The guy is a complete idiot. The single scariest part of the Torries getting any power at that election was letting that moron into the treasury. I would rather the SNP won every last seat at the next Scottish election than put that guy incharge of a lemonade stand never mind one of the worlds most developed countries finances. Especially during this tough time.

 

And my views on the SNP are very well documented on here.

Here here!

 

The guy is a complete idiot. The single scariest part of the Torries getting any power at that election was letting that moron into the treasury. I would rather the SNP won every last seat at the next Scottish election than put that guy incharge of a lemonade stand never mind one of the worlds most developed countries finances. Especially during this tough time.

 

And my views on the SNP are very well documented on here.

 

Indeed - Clarke (who incidentally is the ONLY member of the Coalition who'd been in government before, unless you count Hague's stint as "Welsh Secretary" in the 90s) and Cable are the only people in this ConDemolition who I'd even slightly trust with the country's finances. Even though Clarke might agree with what this Coalition is doing on ideological grounds, even he would recognise pulling spending back so viciously at a time when the economy is in serious trouble is madness.

I would far rather see Cable in charge of the economy. Out of the three treasury candidates he was by far the most capable and best for the job.

There's a big difference between lying and bending the truth.

 

Is there..? Not in my book... "bending the truth" has the same net result - deliberate misleading of people to further an agenda or to cover up facts.... You'd make a great lawyer Suedehead, you know that...?

I'll put it simply: George Osborne is lying.

 

Yep, and now the truth is out there for all to see... Obviously this does need to be put into layman's terms a bit more, but it does point to the fact that massive Public Sector cuts are unnecessary and it's the TORIES furthering an agenda to cripple the public sector purely on ideological grounds, NOT economic ones.... In short they want to destroy the public sector so all their chums in the private sector can basically get their snouts in the trough, and we'll all end up paying more in the long-run for the services we already have....

Yet another stumble for the coalition then... I just hope this madness doesn't go on too long before they're forced to call an election.

Today even Boris Johnson voiced doubts about the scale of the Coalition's cuts in his Telegraph column, and according to Nick Robinson, there've even been a few Tory Cabinet ministers who have been privately questioning Osborne. When the most right-wing people in the country are voicing doubts, you know we're heading for disaster.

 

Btw, I notice Craig is yet to respond to this thread :lol:

I was quite surprised by that column from Boris - although I can't help but wonder if his backing for Ed Balls is a red herring :lol:

although I can't help but wonder if his backing for Ed Balls is a red herring :lol:

 

Indeed, especially as he said he wanted to headbutt him a few months ago :lol: