It is difficult to know what is most depressing about the economy. Jobs are being slashed and homes being repossessed. So it is understandable that the catastrophic black hole at the heart of our public finances is not receiving the attention it deserves.
Yet as the economy shrinks, Britain is about to suffer its worst budget deficit since the Second World War. The gap between government revenues and spending could soar to £132bn, equivalent to a crippling 9.1 per cent of GDP, in the 2009 financial year. This would be higher even than the £118bn forecast still officially clung to by Gordon Brown, and the highest as a share of GDP for over six decades.
In his defence, Brown claims everybody is suffering from huge deficits as a result of the global downturn and that it is unfair to blame him.
But the truth is that our fiscal prospects are much grimmer than anybody else’s.
Under Brown’s stewardship, Britain’s public finances became structurally unsound during the boom years, which means we are now having to borrow more as a share of our economy than any other rich nation.
In fact, the deficit could all too easily hit 10 per cent of GDP in the coming financial year, according to Michael Saunders, economist at banking giant Citigroup. That is the kind of deficit that used to be the preserve only of tin-pot dictatorships. At no time over the past 30 years have America, Germany, France or Japan ever done this badly. And for all the talk that Brown is deliberately racking up a deficit to inject extra demand into the economy, his new-found Keynesianism is largely accidental, an after-the-event rationalisation of years of irresponsible spending.
So far, Brown has got away with selling gilts to pay for his deficit. Since the end of 2003, foreign investors financed 72 per cent of Brown’s borrowing, often accepting low yields in return. Many of these are now nursing huge losses thanks to the collapse in sterling; growing numbers will no longer touch British assets with a bargepole.
All of which helps to explain why Brown will soon embrace quantitative easing — the technical phrase for printing more money. While many believe this would boost the economy, such a policy would also come in very handy for a government facing the greatest peacetime budgetary crisis in Britain’s history. You have been warned.
Allister Heath is Editor of City A.M.