Best placed to weather the downturn

So said El Gordo.

Umm, really?

Britain is likely to suffer more from the economic downturn than any other major country, Alistair Darling has warned. The Chancellor cited London\’s status as a major financial services centre as a reason why the country could be worse affected than others, when asked by Tory MP Adam Afriyie (Windsor) in the Commons why the European Commission and the IMF were predicting the UK would be the hardest hit in the developed world. He said: "We were bound to be affected more substantially in relation to the loss of revenues we are now experiencing because of the lack of profitability in the financial services sector. "London is the major financial services sector of the world. Of course we are likely to be more severely affected as a result of the profitability being reduced and I\’ve made that point on many occasions.

Ah, right, yes, it would be fairly obvious that the place which specialises in finance would be hurt more by a financial crisis, wouldn\’t it?

So what was El Gordo talking about?

20 comments on “Best placed to weather the downturn

  1. Darling is being fairly candid here, so it is all the more reason for worry that this government seems determined to punish people in financial services by its harrying of non-domiciled residents, the proposal to create a new, upper-tax band, etc.

  2. The two things aren’t quite the same. If you belive in flexibile markets and so on and believe the UK has more of those than other countries, then you could believe that although the initial shock will be larger, the response so much better that the medium-term consquences are less.

  3. I think this is the second time Mr Darling has been caught being honest. No doubt No 10 will tell him it’s three strikes and he is out.

  4. Matthew has a point.

    Also, there were structural points in our favour pre-recession: far lower public sector debt than G8 average (yes, even after PFI is counted); and a massively overvalued currency on a PPP basis. This has allowed us to borrow and devalue, which isn’t an option open to more-heavily-indebted countries in the Eurozone.

    Against that, we had higher net private sector foreign debt. While most of this is offset by higher net private sector foreign assets, the former needs paid whilst the latter is less liquid.

  5. “far lower public sector debt than G8 average (yes, even after PFI is counted”

    Bollocks.

    Are you one of Draper’s mob or are you deluded?

  6. No, I’m right, and you’re a fuckwit. UK public sector debt was 39% last year, including PFI but excluding the bank rescues. Lloyds TSB pegs it at 50% this year, compared to 66% in the US and 76% in the Eurozone. This excludes pension liabilities, but so do the figures for all countries (and they’re entirely irrelevant to the question of ability to service foreign debt payments).

  7. [Blog ate my first comment – boo].

    No, I’m right. See this report from Lloyds TSB – we’re 50%, US is 66%, and EZ is 76%. That excludes PFI projects, but they only account for 2%. And it excludes pensions for all countries, but counting them is irrelevant to our foreign debt (and is no saner than counting future healthcare or educational spending).

  8. [Blog ate my first comment – boo].

    No, I’m right. See this report from Lloyds TSB – we’re 50%, US is 66%, and EZ is 76%. That excludes PFI projects, but they only account for 2%.

  9. “Matthew has a point.”

    So why do you and Matthew spend your time calling for a less flexible labour market with ever more absurd and burdensome workers’ rights?

  10. john b: UK debt might have been lower than the G8 average. That is immaterial. The problem is that due to Brown and Blair’s profligacy, it is going to be much higher. Debt servicing is going to place a crippling load on the economy as the world comes out of recession. Debt is deferred taxation. Either the government (whichever that is at the time) will impose swingeing spending cuts, or taxes will rise. Either course will prolong the downturn in the UK relative to other countries.

  11. The problem is that due to Brown and Blair’s profligacy, it is going to be much higher.

    According to the BCC, government borrowing will be c.GBP100bn (5% of GDP) for 2009-10. Even if it’s the same for 2010-11, that will raise total government borrowing as a % of GDP to 60%, which will still be lower than the Eurozone or the US were at the start of the crisis.

  12. El Gordo was preaching to his tribe, who will pay no attention to The Badger.

    And it’s working – check out the opinion polls.

    But remember: despair is a sin.

  13. First off, john b, UK GDP is £2 trillion? Since when? It’s more like $2 trillion, and that’s before the recession.

    Secondly, any figures out of government are intrinsically suspect. Does that indebtedness figure count the Northern Rock bailout? The subsequent ‘stabilisation’ measures? The looming rescue of the Royal Mail’s pension fund? The elephant in the room: public sector pensions in general?

    Thirdly, while government borrowing has got out of hand (and the downrating of Gilts to near junk bond status means servicing the debt will be even more expensive), the real culpability of New Labour was in encouraging the fiscally loose policies that have landed the UK a total debt burden of 300% of GDP.

  14. David, you’re right – UK GDP is about £1.5trn (or £1.4 trn if the absolute most pessimistic estimates for the next couple of years happen). So 65% at the end of the process rather than 60%.

    I’m using the LTSB figures, not the NatStats ones. LTSB is 7% higher than NatStats (even though NatStats do include NR); since this is a blog comment and not a dissertation, I’m not going to do a detailed investigation into why, but I’m fairly sure it’s because LTSB are including everything it’d be sensible to include.

    And pension debt doesn’t matter here: nearly all of it isn’t due until long after the downturn is a distant memory, and it’s not a real liability in the way that a gilt is. Including pensions in your calculations is barely different from including future expected healthcare costs for everyone alive today as government debt (after all, we’ll have to pay them unless we change the law so that we don’t – just like pensions…)

    Another point worth bearing in mind is that the 300% figure is gross not net – when you include foreign assets, the net liability is way below 100%. I found a good piece on this the other day; irritatingly I can’t remember who it was by or find it now (of course, in the event of a total collapse of everything Iceland-style this is moot, as the assets aren’t all liquid.)

  15. So why do you and Matthew spend your time calling for a less flexible labour market with ever more absurd and burdensome workers’ rights?

    I don’t recall ever doing this either, not least because I don’t think the second sentence logically follows the first. But Kay, if you re-read the comment it is full of ‘if you believe’ and was a point about whether the two sentences can be reconciled, not whether I believe they are both true.

    David – “downrating of Gilts to near junk bond status”. What in heaven’s name do you mean by this? It sounds as if you have just strung together some words from an Ambrose Evans Pritchard column that you don’t understand…?

  16. john b: we are rapidly approaching (if we have not already reached) the tipping point where the current – not future – cost of servicing public sector pensions exceeds the contributions to it from the private sector. This is not a far-term problem. It’s no good waving it away with a Keynesian “in the long run we’re all dead.” There is a debt timebomb, to be sure, but the vast increase in public sector jobs during Labour’s reign makes this a problem now, not just later. Brown did not fix the roof (or make hay, or whathaveyou) while the sun was shining and now we’re in the cacky. The sundry bailouts and stabilisations are also a deadweight on any recovery.

    Matthew: if you think bond investors are not going to demand a fairly heavy risk premium (i.e. higher yield) on upcoming UK government debt then you are the one who has failed to grasp the severity of the situation.

  17. we are rapidly approaching (if we have not already reached) the tipping point where the current – not future – cost of servicing public sector pensions exceeds the contributions to it from the private sector

    What on earth is that sentence supposed to mean? Taken literally, you seem to be claiming that the costs of actual public sector pension payouts in either 2008 or some imminently impending year are higher than total tax revenues; this is obviously not true.

    if you think bond investors are not going to demand a fairly heavy risk premium (i.e. higher yield) on upcoming UK government debt then you are the one who has failed to grasp the severity of the situation.

    But in the actual real world, they aren’t: yields on UK bonds are almost the same as yields on German bonds. Hence, you’re the one talking nonsense about the severity of the situation.

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