Britain enters final Brexit talks with listless economy & high debt

Chancellor of the Exchequer, Philip Hammond, does his best to put  forward a positive spin

As it heads into the final stretch of the Brexit negotiations, the UK is bogged down. It has twin problems; a sluggish economy and high debt.

In his spring economic statement, Chancellor of the Exchequer Philip Hammond  tried to be optimistic.

The independent Office for Budget Responsibility (OBR) had raised its 2018 growth forecast to 1.5 per cent, up slightly from 1.4 per cent. The economy has grown for five consecutive years and has exceeded expectations. Manufacturing has had the longest period of expansion in 50 years.

Employment has increased by 3 million since 2010. The unemployment rate is close to a 40-year low of 4.3 per cent. The OBR expects inflation to fall below 3 per cent over the next 12 months. Wages are forecast to rise faster than prices over the next five years.

The projected budget deficit of £45.2 billion ($62 bn) – or 2 per,cent of GDP – will allow the government to ease back austerity. The government can thus spend more on the National Health Service and education, Mr Hammond said.

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The legacy of George Osborne’s austerity & QE

Despite his optimism, Mr Hammond is battling under a yoke of failed economic policies.  His predecessor George Osborne is to blame.

As an antidote to British recession, Mr Osborne’s policy from 2010 onwards, was to slash public spending. The aim was to cut Britain’s massive borrowing.

In the meantime, the Bank of England embarked on quantitative easing (QE). It flooded banks with money and cut interest rates to zero.

The austerity, by far, hurt the poorest people the most, according to an analysis by Jonathan Portes, economics professor of at King’s College London.

The money flood boosted residential property prices beyond the buying capability of young people. This income inequality caused poorer, working class people in the north-east of England, Midlands and Wales to vote for Brexit.

Will pound rally last?

Moreover, populist hard left promises have boosted Jeremy Corbyn’s Labour Party’s membership to around 400,000.  With Labour now level with the Tories in the polls, the UK’s political risk chart has risen. The fear is that after Brexit foreign investment could decline.

“The UK’s public finances have reached a turning point, with borrowing down and the first sustained fall in debt for 17 years,” claimed Mr Hammond.

The OBR’s figures, however, tell a different story. Public sector net borrowing has fallen from its post-crisis peak of 9.9 per cent of GDP in 2009-10, to an estimated 2.2 per cent of GDP this year. But government debt to GDP is projected at 85.6 per cent this year or £1.84 trillion. This is only slightly down from 89 per cent in 2016. The size of Britain’s borrowing has remained high, despite the efforts of Mr Osborne. (He is currently editor of the Evening Standard).

Moreover, the OBR estimates that the payment for exiting Brexit will be £37.1 billion. Within the next 10 years, £34.6 billion must be paid.  But the UK will still have to pay £2.5 billion towards EU pensions until 2064. It is liable as it was an EU member nation from the 1970s.

Mr Hammond admitted that the UK’s debt “remains too high, equal to around £65,000 per household. This makes the economy vulnerable to future shocks. It also imposes a significant burden on future generations.”

“The cost of debt interest payments is around £50 billion each year – more than the amount spent on the police and armed forces combined,” he said.

© copyright Neil Behrmann

This article was first published in The Business Times, Singapore

Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, will be published in coming weeks. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.



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