By: Dr. Mike Campbell
Credit ratings agencies have been appreciative of the UK’s austerity measures which are aimed at deficit reduction. Data just released by the Office for National Statistics (ONS) in the UK show that the UK has managed to meet its own target for deficit reduction over the past year. In the financial year 2010-2011, the UK deficit stood at £136.8 billion; for the current financial year, the deficit is almost £11 billion less – beating the target of £126 billion. Even at this level, the deficit still represents a debt of approximately £2000 per man, woman and child in the country.
The reduction of the deficit was achieved by government savings – the dreaded austerity cuts – and an increase on VAT from 17.5 to 20% which came in in January 2011. If the government plans are achieved, the deficit should be eliminated by the end of the 2016-17. This target remains controversial because critics claim that the austerity cuts will stymie growth causing a reduction in cash inflows to the exchequer. In any event, the deficit reduction moves are unlikely to make a significant dent in the UK public debt which stands at 66% of GDP or just over £1 trillion. The profligacy of paying interest on such a large sum is likely to emerge as a major political topic, but governments of all shades have contributed to its creation. At just 1%, a debt of that magnitude will cost £10 billion to serve (estimates of the actual figure are nearer to £40 billion); should the UK’s credit rating decline, the interest rates would climb, of course.
The Q1 GDP figure for the UK will be released on Wednesday. Unless the UK economy returns to growth in Q1, the country will have entered a technical recession following on from a contraction of 0.3% in Q4 2011.