Bad News for Britain’s economy

JP Morgans has issued a warning to Great Britain about the state of their economy, stating that it is as bad as the 1970s when it was necessary for Britain to apply for a loan from the IMF.

The bank warns that Government debts, when compared to the total size of the economy, are higher than during the 1970s crisis.

It adds that there could be a “marked fall” in the value of the pound as international investors re-assess the health of the British economy.

The Telegraph reports that:

In 1976, Britain was forced to turn to the International Monetary Fund (IMF) for a £2.3 billion bailout. In return for the funds, the IMF insisted on reforms to the British economy including public spending cuts. The period was regarded as one of the most humiliating in the history of the British economy.

In a research note entitled “UK Fiscal Policy: some lessons from the 1976 crisis”, JP Morgan said: “On many metrics, the UK’s fiscal position is currently worse than observed around the IMF loan in 1976…The size of the current budget deficit suggests that the UK is leaning heavily on the credibility it has built up since the mid-1970s.”

The bank’s “central forecast” is that Britain will “muddle through” the crisis. However, JP Morgan added: “The possibility that markets could take a more severe view of the fiscal position is clear, and the 1976 experience demonstrated that the situation can change quickly and unpredictably.

“Officials fretted over the possibility of a marked fall in the currency well before the crisis. Looking back at 1976, one can argue that as the crisis broke, the underlying situation had actually begun to improve (growth had begun to recover and current account deficits had begun to fall).”

Even though Gordon Brown has been warned about the dangers of the high level of government borrowing, he insists that this has been necessary during the recession to stop unemployment rising. However, is that really the case? The issue here is that the Brown Government has plunged the UK into a high budget deficit without considering the necessary tax receipts to cover the borrowing. As I see it, the growth in the welfare state, with an increasing entitlement expectation by those receiving welfare is placing pressure on the budget deficit.