Britain's Deficit Reaches World War 2 Levels; Little Room to Maneuver

It pays to keep an eye on Great Britain aka the little version of the United States - we have taken a very similar path to where we are today. Succumb to finance based economies, loosely regulated, based on high levels of debt, and consumerism... and now the solutions are almost identical. In fact, one could argue that the UK has been leading the charge on innovative government interventions. Many "solutions" I see happen over there, seem to happen stateside within a month or two. Essentially countries running up massive deficits are making an enormous bet - pushing risk onto their currencies. The U.S. has benefited from being the world's reserve currency so as we push more and more chips onto the table, our currency has strengthened. Quite amazing really. If we were any other country - with our spending orgy we'd be in the hands of the IMF by now. The UK, on the other hand, has had no such luck. But in many other ways we are similar - please note the proposed new highest tax rate in Britain for those that make over $150K pounds will be 50%... another look into our future if we ever are forced by the world to actually make good on our debts.

Another constant in both countries are "public officials" sugar coating / forecasting completely incorrectly.... than only admitting how bad it is once they can't obfuscate any further. Thankfully Kool Aid reigns and the lemmings lap at such ministrations eagerly. Hope springs eternal.

Let's see the latest from overseas...

NYT: Britain's Deficits Deepen, Outlook Grows Gloomier

• Britain’s budget deficit is to reach £175 billion, or $255 billion, this year, the highest level since World War II, making it more difficult for the government to pull the country out of the recession ahead of a general election next year.
• On Wednesday, Britain’s chancellor of the Exchequer, Alistair Darling, conceded that the outlook for the country’s economy and its debt levels this year looks gloomier than it did five months ago. In his annual budget speech to Parliament, he said Britain would have to borrow £57 billion more this year than predicted earlier and the economy would shrink 3.5 percent this year instead of the 1.25 percent that he forecast in November.
• To reduce the deficit, which would be the highest of any nation among the Group of 20, which comprises G-7 members and major emerging economies, Mr. Darling proposed to increase income tax for the highest earners to 50 percent, from 40 percent, and pledged to clamp down on tax loopholes. (sound familiar?) But he balked at announcing any further tax increases or spending reductions.
• “The slow pace of the improvements of borrowing is extremely disappointing and worrying,” said Philip Shaw, an economist at Investec in London. “The government is obviously reluctant to do the dirty work ahead of the election. A few measures to hit high-income earners won’t do it.”
• The dismal outlook and rising debt pushed the pound lower against all major currencies on Wednesday and government bonds dropped.
• He stuck to his earlier prediction that the economy would start to grow again toward the end of this year and said that lower prices and a pickup in demand would allow growth of 1.25 percent next year, which some economists criticized as too optimistic. (green shoots of promise - sort of like when he stuck to his call that the economy would only fall 1.25% this year - let's check back in 9 months)
• The latest unemployment statistics painted a gloomier picture on Wednesday when figures showed that the number of people out of work rose by 73,700, to 1.46 million last month, the highest since 1997.
• With fewer people paying income tax and revenue from corporate tax dropping as well, Britain’s government is finding it difficult to spend its way out of the recession. (should sound familiar ...) Mr. Darling announced a range of investment plans, mainly in renewable energy projects like wind farms and biotechnology, but some economists said their relatively small scope only illustrated that the government was struggling to find the money to pay for them.
  
• The government’s plan to increase income tax for those earning at least £150,000 attracted criticism from the British Chambers of Commerce and other business groups, which said it would serve as a disincentive for top talent to move to the country and harm London’s status as a world financial center. (should sound familiar....)
• Other measures announced Wednesday included the introduction of a car-scrapping scheme, similar to that in Germany, to assist Britain’s ailing auto industry.

NYT: Little Room to Maneuver on Budget for Britain

• Less than a year after the government said it would spend its way out of the recession, Mr. Darling might be forced to curb spending and increase taxes to keep the country from spiraling further into debt. Just five months ago, Mr. Darling said gross domestic product would contract 1.25 percent or less this year.
• “He doesn’t have much room for maneuver,” said Sam Hill, a fixed-income fund manager at Threadneedle in London. “On the one hand he wants to loosen fiscal policy, but on the other hand he’s already in a massive hole, and if he does anything to make that worse the market will react very negatively.” The pound has dropped sharply in recent days against the dollar because of concerns about Britain’s economic outlook.
• Now, Mr. Darling is being pulled in opposite directions by Britain’s business community, which asked him to focus on reducing debt, and trade unions, which want to preserve jobs.
• Some economists fear that the government might never again be able to rely on the financial services sector for 14 percent of tax revenue, as it did in 2007, and say that it needs to look for alternative ways to raise cash.

Now as you scoff at those silly folks overseas, keep in mind that 40% of earnings growth in the U.S. in our illusionary prosperity much of the middle part of the decade came from... financials. Where shall it come from in the future?

Ah yes... the next bubble.