Is Britain Broke? A Look at England’s Financial Reality

Britain is the only major economy still in recession, and while the 4th quarter is expected to show that the economy has finally returned to growth, there is still much work to be done before a lasting victory can be claimed. Assuming then, that the recession has indeed been relegated to the history books, it is time now to turn our attention to the future and this means taking a good, long look at Britain’s finances.

[mserve id=”Central_Bank_BOE.jpeg” align=”left” width=”400″ caption=”Bank of England” alt=”Central Bank of England BOE” title=”Bank of England”]

Britain’s growing debt has been a source of concern for some time now, and 2009 did nothing to reduce this concern. Lower government revenues stemming from the recession hurt the income side of the government’s ledger, while trillions in stimulus spending, together with a hefty increase in unemployment benefit payments, weighed heavily on the expenditure side. The result? A total budget deficit for 2009 now expected to breech £175 billion (US$285 billion)! This is the most the British government has ever been forced to borrow in a single year and represents about 12 percent of the country’s total income as measured by GDP.

When applied directly to Britain’s debt, the 2009 deficit pushes the total debt to more than £2 trillion (US$3.25 trillion); or more than 150 percent of the country’s GDP. If you’re a citizen of Great Britain, your share of the debt has now grown to £33,000 (US$53,600).

Britain’s Challenges for 2010

There is little doubt that Britain’s overarching challenge for 2010 – and many years beyond that – is how to address the surging debt. This concern notwithstanding, there are other, shorter-term challenges that Britain must first conquer before meaningful headway can be made in tackling the debt.

The first and most pressing issue is how to withdraw billions in government spending without sending the economy into recession part two – a recession “double-dip” if you will. Since late November 2008, the British government has committed trillions to stimulus spending for everything from £30 million (US$48.7 million) for a “car scrappage” scheme, to £200 billion (US$325 billion) for quantitative easing, to more than £20 million (US$32.5 million) in direct support to the banking system. Whether or not you agree with these expenditures, the simple fact is that the government borrowed heavily to put this money into the system and now that the first signs of recovery are apparent, plans are being made to wind down the spending. It is paramount that this be done in such a way as to ensure that the fledgling recovery is not knee-capped by a sudden reduction in liquidity.

The other area which promises to be even more controversial than the stimulus spending, deals with the question of financial reform. The first bank bail-out was – at best – distasteful, for many taxpayers and the sight of banks continuing to hand out millions in bonuses even after receiving public money, was certainly not the financial industry’s finest moment. The truth is however, that even with this taxpayer support, there is no guarantee that the banking system will remain crisis-free in the new year, and the banks would do well to take heed of the growing anti-bank sentiment.

The banks pretty much burned all their bridges with the public once they resorted to their “business as usual” approach, using tax dollars to award themselves huge bonuses even as more and more people lost their jobs. The short-sightedness was simply breathtaking and the government lost no time in channeling the public’s anger into a mandate to bring about reform.

We saw the first of these actions when Chancellor of the Exchequer Alistair Darling announced a new 50 percent tax specifically on bankers’ bonus pay for any bonus amount exceeding £25,000.

“The biggest burden will fall on those with the broadest shoulders,” Darling said to Parliament in what could only be described as language carefully crafted to ensure the maximum political return.

I would caution the government however, to refrain from populous politicking at such a critical time in the nation’s recovery. I am not in disagreement with limiting bonuses given the situation, but do not set this up as some form of class warfare. The country needs strong banks – and the City itself needs a thriving financial district – if the recovery is to be sustained. Yes, the broadest shoulders do need to take on a greater share of the task, but in order to get finances in order, the pain must be shared by everyone.

Britain is facing the widest deficit gap it has ever known, and a dramatic combination of spending cuts and increased revenue and taxes, is the only way this gap can be closed. It will take a considerable amount of political will – far more than that required to go after bankers’ bonuses – to complete the task.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.