Ignore George Osborne, Britain is still in deep trouble

Above all else, George Osborne has always been a politician.

That’s a shame because the country needs someone who knows a thing or two about economics. Osborne’s claims today that “Britain is on the right track” don’t stack up.

Nothing has changed. In fact, the country’s financial outlook is getting worse. Britain’s economy is still in a lot of trouble.

Lies, damn lies and economic forecasts

Human beings are lousy at predicting the future. And economists are even worse. Their fancy computer models and spreadsheets aren’t very useful. Yet it doesn’t stop lots of very clever people pretending that they can tell us what’s going to happen.

Take the people at the Office of Budget Responsibility (OBR), those independent number crunchers who feed their views to the government.

They’ve always believed that an economy that was built on excess debt can get back to growing at 2-3% per year fairly quickly. They still think it can – just a bit slower than they did back in March.

OBR forecasts for UK GDP

OBR forecasts for UK GDP

But a closer look at the OBR’s forecasts leaves us thinking that they are still woefully optimistic.

Apparently our indebted households are going to spend Britain back to prosperity. Wages will be going up by nearly 5% per year by 2015-16, whilst the amount of income that people save will decline from 7.1% in 2012 to 5% in 2017.

Despite the lack of credit, business investment, which grew at just 2.9% in 2012, will be growing at 10.2% by 2015.

Our housing market will finally recover. The price of houses – already unaffordable to many – will go up by 18% by 2017. The number of residential housing transactions will go up by more than 50% and stamp duty takings will double.

And the value of shares is going to rise too. The FTSE-All Share index is going up by nearly 30% between now and 2017.

Let’s hope the OBR is right. But these forecasts are hardly prudent. If Britain’s economic predicament wasn’t so serious, I’d be tempted to call them laughable.

Britain is in what’s called a balance sheet recession. It’s in a debt trap where too much borrowed money from the past has to be paid back before the economy can grow again. If you want to see what one looks like, look at Japan’s economy over the last 20 years.

Debt is going through the roof

The problem with the government’s deficit reduction plan is that it has never been credible. Government spending is still on an upward trend. Apart from a small reduction this year (due to capital spending reductions), it is forecast to keep on going up.

Government spending (£bn)

UK government spending (£bn)

Cutting the deficit (our annual overspend) has always been based on growing our way out of trouble and getting bigger amounts of tax in the coffers on the back of it. Yet even if you believe the OBR’s forecast for economic growth, £466bn will still be added to the government’s overall debt pile over the next five years.

UK government budget deficit (£bn)

Excluding Royal Mail pension transfer and APF money

UK government budget deficit

How long can the bond market and the pound defy reality?

Cutting corporation tax rates and encouraging business investment are welcome. Capping the increase in welfare payments is long overdue. But the fact remains that the size of the state is too big and Britain is still living beyond its means.

Osborne keeps harping on about how the low bond yields on government debt are a sign of confidence in Britain.

This is delusional. It’s true that other countries are diversifying their foreign currency reserves and some of that is going into gilts, but bond yields are low mainly because of the Bank of England’s printing press. The Bank now owns virtually a third of all bonds outstanding.

Someone has to buy the £466bn (or more) of extra debt that the government will take on. If the Bank of England buys it by creating money out of fresh air, it might keep interest rates lower than they should be for a while longer. But it won’t be able to do anything about stopping the pound from falling in value.

Britain is drowning in debt. That’s why we’d continue to stay away from bonds and invest in foreign assets to diversify your exposure to sterling.

24 Responses

  1. 05/12/2012, Boris MacDonut wrote

    House prices should only rise by 10% by 2017.
    Osborne is, as always, too optimistic. In spite of cynically fiddling to reduce our deficit by £65billion Gideon’s incompetence will have added £630 billion to the national debt in the 5 years of his tardy mismanaged Government. a 70% increase in debt from the party that said they’d clear up the Labour “mess”.
    How will wages rise at 5% a year for three years? 25% of workers are on a pay freeze until 2013 and then limited to 1% rises for three more years. So the lucky private sector must be in for a bonanza of pay rises hitting 6.4% pa for 3 yrs.

  2. 05/12/2012, NeutronWarp9 wrote

    Criticisms of Osborne’s position are all well and good but what would people prefer him to say? We are terminally doomed, have no credibility and should be avoided at all costs? That route leads only one way.
    Alternatively, you can bluster, exaggerate the good points, ignore the bad points, raise your chin and bluff it out with a beautifully-timed Agincourt salute to all those who think different.

  3. 05/12/2012, HD2 wrote

    The position your newspaper has taken over the true state of our national debt and finances is one I have recognised as true since 2005 and my mother (independently) since 2007.

    If a biology-specialist schoolmaster and a retired chiropodist can work this out (that the Welfare State was, is, and always will be unaffordable; that the NHS should be privatised, with compulsory health insurance for those in work, as in the rest of the world; that Child Benefit should end for all; that schools should be free to charge modest fees, AND award 50% scholarships; that our non-urban road network should be sold off; that the full pension age should rise to 75, with 20% extra payable every year from age 70) then why cannot those with main-frame computers and economics degrees?

  4. 05/12/2012, CHRIS wrote

    Osborne has to keep racking up the debt to create fake growth. If he failed to do so the full horror of the effects of globalisation on this country would be clear for all the population to see and our lying and traitorous politicians would be dangling at the ends of ropes.

  5. 05/12/2012, jackanory wrote

    We need to start building and growth will follow!

    Unfortunately land prices are too high and wages and jobs are at a low!

    “turning back the clock now would be a disaster” B%%%%x!!!!

    It doesnt take a rocket scientist or a conservative MP

  6. 05/12/2012, NeutronWarp9 wrote

    3 – HD2. I am not sure if you and yours are sages or onions, but the system you espouse is not for me and hopefully not for many Britons.
    Surely the whole point of our education, health & welfare systems is as a safety net – not a free ticket to be abused – but an example of civilised benevolence that we should value. And as for your fees and insurance premiums, I call them taxes.
    Now, if your manifesto includes legalised guns and the return of the death penalty (for, say, all repeat offenders and TV chefs) I might be tempted.

  7. 06/12/2012, hef wrote

    Linked to this article is your scary mail out and report about the collapse of the UK economy. I’ve have just read the much vaunted special report. there are 3 main recommendations, buy: gold, dividend yielding UK non cyclical FTSE100 equities, buy italian (european) & japanese shares. After all the hype and promises about preventing loss of income through UK banking collapse, sterling collapse, pension raids, currency controls, the need to get your £££ beyond the reach of UK gov etc etc this is somewhat disappointing Moneyweek and smacks of marketing hype. Disappointing.

  8. 06/12/2012, Luke wrote

    The last 4 paragraphs of this article http://www.bbc.co.uk/news/business-20619392 read:

    “There was also a reduction in the deficit of £11.5bn in the current year as a result of the Asset Purchase Facility.

    As a result of the Bank of England’s quantitative easing programme, the central bank currently owns a lot of the government’s debt.

    If anybody else had lent money to the government it would have had to pay interest on those loans.

    The government has now decided it should not be paying interest to the Bank of England, and the benefit of that has reduced the deficit and will continue to do so for the next four years.”

    Surely this counts as default….

  9. 06/12/2012, ricardo wrote

    6. @NeutronWarp9 you say “And as for your fees and insurance premiums, I call them taxes.”

    it’d be better if you called them “taxes we don’t pay”, or “taxes that don’t get collected”.

    I think HD2′s point is that the money has to come from somewhere. At the moment it comes from a printing press. Even I know that is unsustainable.

  10. 06/12/2012, Critic Al Rick wrote

    @8. Luke

    If the BoE represents those whom I suspect it represents then the loss of interest payment by the UK Govt is not default on behalf of the UK Govt but forbearance on behalf of TPTB.

  11. 06/12/2012, Le Brit wrote

    Cheer up you miserable lot it could be far worse, Balls could be running the show!!!!!!

  12. 06/12/2012, Eddie wrote

    House prices would drop immediately by a third of or more if the government and Bank of England stopped propping them up.

    We need to restore sanity to the housing market. It may be necessary to manage or stop foreign investor buyers to do that. We need rent controls reintroduced, and end to most housing benefit, more taxes on second homes, and a government with the guts to stop subsidising the buy to let market, remove illegal immigrants, reduce immigration, make divorce and single parenthood more difficult etc (because instead on one house for a family, a broken family needs two!)

    The problem is, politicans have all lived all their lives under a system whereby the government has bribed voters with rising house prices (which make people rich, or at least feel rich) – Labour, Tory, whatever, All the same.

    So now the government is trying to do the exact same thing now by proposing to concrete over the countryside and build more houses. Idiots.

  13. 06/12/2012, Chester wrote

    We are starting to see the begining of a long term rise in global interest rates, and the BOE will be powerless to reverse the trend. What politicians CAN do is stop pretending that State spending is sustainable. It is massively overmanned, underpinned by “funded budgets” and unionised vested interests. Budgets funded by debt are by their very nature “unfunded”

    Worse still, this insanity is an accepted norm by “officials”. One recently confirmed the function of his Dept could be undertaken by 5% (yes, FIVE) of over 1000 in his employ. This madness can be reversed by political leadership, and acknowledgement that our current tinkering around the edges is futile. Without urgently shrinking state spending to 20% of GDP, forget any notion of sustained growth. It cannot happen unless we become truely competitive

  14. 06/12/2012, The joker wrote

    Just like private finances the government cannot gone on borrowing forever. That appears to be the caring solution but it is a delusion. Ultimately debt has to be paid back and it will be worse the bigger the debt. However comforting the safety net it can only be there if the gov’t can pay for it. Clearly it can’t so we had better realise that NHS and all the other handouts are on borrowed time and money. Ostrich solutions may buy time but will get us nowhere.

  15. 06/12/2012, Critic Al Rick wrote

    @ 12. Eddie

    TPTB have an agenda; propping-up the housing market in the UK must be a necessary requirement for them to keep on track regarding the longer-term ambitions of that agenda.

    Maybe this is the price we are paying for hosting a disproportionately huge banking sector; the UK’s private wealth is being syphoned-off by Parasites.

    If we, collectively, were more in control of our destiny I doubt there would have been anywhere near as much immigration over the past decades; all part of their agenda.

    We’re merely pawns in a corrupt playing-field.

  16. 06/12/2012, East Beach Dave wrote

    you cant keep borrowing without repaying, you must live according to your income
    The rich and poor gap grows with public unrest

    UK needs to get back to working hard and becoming self sufficient making our own produce not importing from other countries
    No benefits without working. Farmers, recycling tips, street cleaners, Care homes, environmentalists etc need extra help of the unemployed. No greedy bankers milking the system.

    MP’s paid average National working for your country is a privilege not a milk cow
    Crime must be deterred through hard time served
    Immigration and foreign aid halted until we can feed, clothe and house all of our own people
    Until we take a tougher line as a nation and correct the unfair and stupid human rights laws and excesses of our lazy something for nothing society we are heading for a massive social economic revolution
    Troops on the streets and food riots Just wait and see

  17. 06/12/2012, AndyDoesStocks wrote

    @11 Hear! Hear!

  18. 06/12/2012, GoneWest wrote

    Over the last few days I have seen 2 outstanding examples of innovation by our young people that give me real hope. We need a gradual but determined programme to shrink the state to fulfil it’s essential functions only and free the people from excessive taxation and bureaucracy. The future of our country lies in the hard work and imagination of individuals not politicians who think they know what’s best for us. We tried that and look where it got us.

  19. 07/12/2012, Roberto Birquet wrote

    HD2
    If a biology-specialist schoolmaster and a retired chiropodist can work this out (that the Welfare State was and always will be unaffordablethat the NHS should be privatised), then why not those with economics degrees?

    Maybe you are wrong HD2, but have such a high opinion of yourself, you haven’t considered that.
    That UK is drowning in debt is true. But most of the debt is in the private sector. Even if you forget the billions owed by the two most indebted sectors: non-financial companies and financial companies, consumer debt dwarfs govt debt in the UK. So how would consumers buying and companies arranging health insurance better the situation? Answer, it wouldn’t, only transfer it from govt debt to already even greater private sector debt. And private health is ALWAYS dearer than govt-provided healthcare – everywhere.
    And as for economics degrees, how many of those sheep saw the crisis coming? Most economic policy has been down to those wizards the past 25 yrs.

  20. 07/12/2012, Roberto Birquet wrote

    9
    Ricardo
    That is not at all what HD2 wrote. And if he had meant that, he/she needs to learn to expalin himself.

    Of course, everything has to be paid for; what a simple thing to say. But the NHS is far more efficient in cost to outcomes than private health.

    Even if you look at countries under communism that started out dirt poor and became just a bit less dirt poor, their nationalised healthcare worked. One of the few things that did. Even Cuba is often rated among advanced nations, rather than third world when comparing healthcare – if nothing else.

    Private business is more effective, but globally, state education and healthcare are success stories. And cutting welfare will mean higher wages and/or lower house prices: everything has to be paid for.

  21. 08/12/2012, disgusted tunbridge wells wrote

    I cannot understand we we persist in sending aid to overseas territories some of whom don’t need it (eg china,india etc) when we have such debt problems at home. Also why do we persist in green policies such as wind farms which are totally inefficient and being funded by the taxpayer. The carbon dioxide theory is far from proven and costing us a fortune. Even if it as proven unless USA,India,China adopt such policies Europe alone is not going to have any significant effect. USA is now boasting that it is self sufficient in fossil fuels because of shale gas etc Why are we not spending more to develope this technology

  22. 09/12/2012, Boris MacDonut wrote

    #21 disgusted. “Some of whom don’t need it ” presupposes that some do. I assume you object to helping the needy too. It is part of being a leading ,civilised, wealthy nation to pay at least a small amount to help others. We and Europe are obliged to set an example. I guess when New Zealand gave women the vote folk like you asked what is the point of little insignificant New Zealand doing this if nobody else does?

  23. 10/12/2012, Simon Hinds wrote

    The amount of petty, ignorant statements here is alarming. We cannot afford such idiocy. One, cutting immigration and overseas aid IS NOT going to solve our ecnomic problems. Neither is merely cutting state spending. According to a JP Morgan report, the UK has debts that is 900% of GDP. Government debt is smaller than household and business debt. The majority is in the financial sector, http://www.debtdeflation.com/blogs/2011/12/31/debt-britannia/ We need renege on derivative debt and put some banks into controlled bankruptcy.

  24. 11/12/2012, Boris MacDonut wrote

    #23 Simon. You are wrong. UK debts amount to 510% of GDP acording to the World Bank. Ireland’s are at 13 times…

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