Wednesday, 9 December 2009

UK's PBR - an exercise not in Austrian but Ostrich economics

The Pre-Budget Report delivered Wednesday (9th) by UK Chancellor Alistair Darling should have removed any doubts that the credit ratings agencies have about maintaining their AAA status of UK government debt. The downgrades should be just a matter of time.

The speech was extraordinarily vague on the core issue that Darling claimed to deal with i.e. how the UK government is going to cut the deficit in half in 4 years. There were no real surprises - even the tax on bankers' bonuses had been well trailed - but the most obvious shortcoming of the speech was the total lack of a clear outline of the budgets for public expenditure programmes over the next four years.

Without providing any meat on the bone with respect to cuts in public services, and with an eroding revenue outlook, Darling was effectively resting his entire case on the completely unsupported forecast that from 2011 onwards the UK economy will be growing at 3.5% per annum. The only plausible conclusion that one can reach is that the UK government is engaged in a similar kind of behavior to that of an ostrich when confronted by something scary.

The most generous interpretation of Darling's decision to bury his head in the sand at the enormity of the problem in the UK's public finances, is that it was motivated by political expediency and the need for careful posturing in view of the forthcoming election campaign, which has to be held during the first half of 2010.

A less generous interpretation is that the UK government simply has no alternative but to adopt a version of the extend, pretend and hope for the best mindset that has prevailed in Japan over the last decade and more.

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