Britain readies to be a little less great
I have heard many number of Indians (or other people who were colonised by the British) complain about the arrogance of a country that adds the adjective “Great” to its name. This, of course, is highly unfair. Great Britain earns its name from the Latin-cum-French construct “Grande Bretagne” which really translates to “Big Britain”. “Little Britain” was the name for the present French province of Brittany whose existence as an autonomous entity is now largely forgotten – except among Bretons.
Either way, Great Britain is going to be a lot less “grande” in most sense of the word over the next few years. It isn’t evident in London. Real estate prices have, at best, levelled off at already record high levels. Fortnum and Mason’s still bustles with people prepared to spend five pounds on a cup of tea accompanied by indifferent service. Buying a paperbook is, to someone from India, a nonsensical thousand rupees place.
But too much of Britain’s recent prosperity has been driven by a bloated financial sector that is being battered by one shock after another. And by debt. As the IMF pointed out, the United Kingdom’s finances are only marginally in better shape than the PIG economies of southern Europe.
PIMCO, the world’s largest bond house, noted earlier this year that Britain was sitting on a “bed of nitroglycerine.” The country’s outstanding stock of debt was about 75 per cent of GDP and was rising so rapidly that it could reach 90 per cent in a few years’ time – enough to reduce economic growth by one percentage point. Not much if you are an emerging economy but plenty for a country which will struggle to attain one or 1.5 per cent growth by 2012.
The new Conservative-Liberal Democrat coalition recognises the challenge. It has announced it will cut the domestic budget by six billion pounds. But this is largely symbolic as the budget will still rise from 605 billion pounds in 2009-10 to around 638 billion pounds in 2010-11. It will just be smaller than the original 644 billion pound projected budget.
And, one suspects, these cuts will be offset by the red ink spill that BP – which contributes about six or seven billion pounds in taxes to London’s coffers – is suffering in the Gulf of Mexico right now.
Whatever happens, Britain is going to go through some incredible spending cuts and tax raising over the next few years. Trawling various economists’ statements, the market seems to expect the new government to reduce the national debt by some three or four GDP percentage points over the five-year life of the present Parliament. That’s about 100 billion pounds – which is little short of amazing.
The government rightly believes it should do the severest cuts at the beginning of its term and hope recovery sets in before the next elections. I wonder, however. As far as I can see, much of the demand in the UK economy is still dependent on government spending. If this is going to contract drastically, the private corporate and household sector needs to spend like crazy to compensate. Or a lot of rich Arabs, Chinese and Indians need to go hog wild on Oxford Street for 12 months of the year. I don’t see either happening, at least not at the kind of magnitude that would be needed to keep the economy growing.
So the pound will have to fall and the British economy will have to contract. The Confederation of British Industries said earlier this year that the post-Lehman Brothers recession has already meant the UK economy is about a tenth poorer than it might have been. But that was notional. Now the real stuff begins.
It is interesting that interest rates for British sovereign debt have not budged much. I think this reflects a belief, probably well-founded, that the British leadership is prepared to swallow bitter pills in a way that, say, the Spanish or Greek ruling class is not. I hope so. Sometimes, though, the likes of David Cameron or Ed Milliband strike me as a bit fluffy and post-modern in their speech. Not quite the stuff of the thin red line and the empire building Angreez of the past.