British budget borrowing 12.4 % GDP

April 22, 2009 1:34 p.m.

U.K. Chancellor Alistair Darling has released his budget for 2009. It forecasts a fall in growth for 2009 of 3.5 % followed by a recovery in 2010. The budget also confirms that Britain is following a policy of moderate Keynesian stimulation coupled with significant quantitative easing on the monetary policy and debt management front.(As a former Ph.D. student at the LSE it pleases me to see the British treasury formally announce the adoption of the policy of quantitative easing in their budget documents (p.29 of the debt management document) since it is a policy alternative that I first wrote about in the early 1980s under the subject of monetizing a portion of the debt and explored in a series of articles and monographs on deficits and debt management.Contrary to the conventional wisdom the policy does not result necessarily in inflation, provided it is done in a controlled manner at rates below 25 % of the broadly defined money stock, particularly when the rate of inflation is already on a downward path.)
Unemployment is rising in the U.K.It is currently 2 million and there is a risk of rising to 3 million in the coming months. Inflation is falling with the latest retail price index in negative terrain. The C.P.I. is expected to fall to 1 %. Hence, the timing is perfect for the policy option.

The central government's net cash requirement is increasing from 32.6 billion £ in 2007 /08 to £ 162.4 in 2008/09 . Net borrowing in 2009 will exceed £ 175 billion. This will amount to about 12.4 % of the GDP. (H.M.Treasury Debt Management report)

This is a significant deficit to GDP ratio but still substantially below what Britain experienced during the second world war when the ratio exceeded this level. The total debt to GDP ratio will be 59 % rising to over 75 % by 2011. Again this is far below what Britain sustained during the Second world war when debt ratios approached 300 % of the GDP.

A good chunk of the rise in the deficit is the passive response to the severe economic downturn, but some of it is accounted for by the British determination not to repeat the errors of the first years of the Thatcher period when deficits were deliberately cut and the debt unfunded despite rising unemployment. The British unemployment rate then rose to well over three million .

In future years the Government is planning expenditure cuts which may or may not be necessary as the economy recovers. For the moment it is quite correctly resisting the calls of the Conservative opposition for dramatically sharper reductions in spending and belt tightening. It should probably spend even more than it is on capital investments and counter cyclical stimulus but at least it is moving in the right direction.