Say Anything Blog

Iceland became insolvent and threw itself on the grace of the International Monetary Fund earlier this year.  Dubai is on the brink of collapse and looking for a bailout from its Arab neighbors.  And now comes word that Great Britain is in perilous financial straits thanks to run-away government spending.

And if you think Britain’s problems sound eerily similar (if more pronounced) to America’s economic woes, you’re right.

These are the facts.

Even before the financial crisis, the British Government spent roughly £30billion more per year than it earned in tax revenues. This money, of course, had to be borrowed from international investors.

Today, the Government needs up to £200billion a year for at least the next three years in order to meet its spending commitments. But the Government’s estimates invariably understate its true need, and they have to be continually revised upwards.

Before the crunch, total government debt stood at roughly 40 per cent of GDP. It is now around 60 per cent of GDP, but is projected to soar close to 100 per cent in the next few years. But again, that is not the full story.

Treasury estimates of the size of the national debt ignore so-called ‘off balance sheet commitments’, such as Private Finance Initiatives (effectively, hospitals and schools built with money loaned by the private sector) as well as the massive unfunded government pension liability.

There may be other, hidden, liabilities. After this week’s shocking revelation of secret loans of £62billion made by the Bank of England to the Royal Bank of Scotland and HBOS at the height of the credit crunch, who knows how many other skeletons remain in the Treasury’s closet?

It is wise to assume that the true size of Britain’s debts could be much bigger than we all think.

Yet politicians of both parties can’t acknowledge this. Why? Because any dispassionate analysis would spell only one thing - we need massive spending cuts and tax rises to avoid heading the way of Iceland and Dubai.

The problem is that even raising taxes doesn’t solve this problem.  Having government spending be a majority of your economies gross domestic product is an unsustainable economic reality.  Because the government doesn’t produce anything.  Having government spending be more than a nation’s GDP means that the government is producing more spending than the private sector is producing prosperity.

That simply doesn’t work.

Here in America, government spending as a percentage of GDP is at 45%.  That’s projected to go down to 42% next year, but with the economy failing to grow as fast as the rosy prognostications from the Obama administration and with heavy new spending in the for of a health care bill on the horizon the more likely scenario is that percentage to keep going up so that we find ourselves with government spending being more than half of our GDP.

Just like Great Britain.

And we’ll continue to fuel this massive increase in spending with money borrowed from international creditors.  Just like Great Britain.  And so we face a choice: Either we cut spending or face the consequences.

The same choice being faced by Great Britain.

To be perfectly honest, the only debate that should be going on in Washington DC right now should be over what spending to cut.