Delegates at the Charity Investment Forum 2011 were presented with conflicting views of the health of the UK economy by the morning’s two plenary speakers.
First up was Mark Littlewood, director general at the Institute of Economic Affairs (IEA), who warned that the UK’s fiscal position is worse than reported by the government and that public spending cuts are too modest.
Littlewood highlighted a paper written by IEA fellow Nick Silver which argued that the UK national debt stood at £4.8tn in April 2010, rather than the £772bn which was calculated by the Treasury. According to Silver, the government should not exclude public sector pension liabilities from the balance sheet.
On recent government cuts, Littlewood warned they were relatively modest – amounting to only 3.5 per cent of spending over five years: “Even if the coalition makes the cuts outlined,” he said, “public expenditure as a percentage of GDP will only be cut down to 2007 levels.”
He added that almost 60 per cent of the UK’s expenditure was allocated to education, health and welfare. Spending in these areas was set to rise every year until at least 2015, he said. “The cuts and potential tax rises will not repay the debt,” said Littlewood. “By the end of the coalition’s first parliament we will only be no longer adding to it. It is an enormous debt for the generation to come.”
More positive slant
Later in the day however, the Evening Standard’s financial editor Anthony Hilton took a much more optimistic stance and attempted to rebut many of Littlewood’s arguments. He argued that it was only in the 1970s that national debt fell below 30 per cent as a proportion of GDP, because previously the Napoleonic War and the two World Wars had pushed the figure well into three figures. As a result, he said: “Most of the time when this country has been prosperous we have had far higher levels of debt than we have now.”
In another example, he pointed out that in 1993, as a result of Black Wednesday, the UK’s debt was higher than it had ever been at that time, yet by 1997 the economy had changed “from a basket case to reasonably prosperous”.
As such, he emphasised that the important issue is not the quantum of debt, but the size of the portion that has to be refinanced. “The question is whether you have the credibility to carry on borrowing. In this country we have fairly long-term debt, the average life is about 14 years, whereas the Greeks and others have only two to three-year debt. So when credibility is threatened it catches up with them much faster.”
Furthermore, he argued that the interest paid by the UK government on gilts largely becomes the income of pension funds and charities, “so it’s not as if it’s going into some black hole or being exported to the moon. 80-90 per cent of government debt is held within the UK, so it’s effectively a transfer payment within the country.”
