Thinking the unthinkable - might there be no way out for Britain?
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thinking the unthinkable
might there be no way out for Britain?
Tullett Prebon Group Ltd
155 Bishopsgate project armageddon – the final report
London EC2M 3TQ
Tel: +44 (0)20 7200 7000 Dr Tim Morgan Global Head of Research
Fax: +44 (0)20 7200 7176
www.tullettprebon.com
strategy insights | issue seventhe final report of project armageddon
thinking the unthinkable
executive summary
The United Kingdom is mired in assumptions about growth, revenues Such an approach would drive the
debt, and her economy is flat-lining. and the deficit, the government public debt ratio to 100%2 by 2015 and
Each side of the political divide has a concedes that debt ratios are set to 150% by 2021. The latter number is
different take on the best solutions rise further. irrelevant, because it is clear that, on
to these problems. The Coalition any such debt trajectory, the UK would
government believes that the huge Official debt numbers exclude the be forced into some form of default
fiscal deficit must be eliminated. net present value of unfunded public long before then.
Its opponents argue that fiscal sector pension commitments and
tightening will undermine the obligations under PFI contracts. Recognising the imperative need to
prospects for growth. Together, these total an estimated reduce the deficit, the government has
£1.35 trillion, lifting the total of set out a plan whereby modest real-
Project Armageddon was established public debt and quasi-debt to £2.46 terms spending cuts, and a big increase
to examine the possibility that both trillion (167% of GDP). In addition, in revenues, will reduce the deficit from
sides’ warnings are correct but that the potential costs of financial sector 11.1% of GDP in 2009-10 to 1.6%
neither side’s prescriptions will work. interventions total £1.34 trillion. by 2015-16.
We conclude that Britain’s debts are The UK is a debt-saddled European
unsupportable without sustained peripheral country, a fact which forex The snag with this otherwise admirable
economic growth, and that the markets alone seem to have recognised plan is that it depends upon some
economy, as currently configured, is thus far. pretty heroic economic assumptions,
aligned against growth. most notably the delivery of growth of
Private debts, too, are huge. The 2.9% by 2012-13. At 2010-11 values,
Radical solutions are required if a borrowing binge of the last decade and after allowing for an expected
debt disaster is to be averted. All has lifted outstanding mortgage £25bn increase in debt interest, the
macroeconomic options have been debt to £1.2 trillion, whilst unsecured government plan requires that the gap
tried, and have failed. The only consumer credit exceeds £210bn. between revenue and expenditures
remaining options lie in the field of be narrowed by £159bn. Increases in
supply-side reform. Unfortunately, These levels of debt are manageable tax rates will contribute £31bn, and
public opinion may be inimical to the if – but only if – the economy can spending cuts a possible £44bn (so
scale of reform that is required. deliver growth. long as unemployment falls as the
government expects), but the bulk of
mired in debt roads to nirvana?
the deficit reduction is expected to
The general public are probably The government is undoubtedly right result from a growth-created £84bn
unaware of the true scale of Britain’s to assert that the UK must achieve increase in tax revenues. If growth were
debts. Public debt, reported at 60% of a drastic reduction in the pace at to come in at half of the official target,
GDP1, rises to 75% on the Maastricht which the public debt is rising. To interest costs and other spending
Treaty definition by which countries test this assertion, we have projected would rise, tax revenues would fall very
such as Greece, Ireland and Portugal the implications of continuing to run far short of expectations, and the plan
are measured. Despite optimistic primary deficits at the 2009-10 level. would unravel.
1
Public debt data as at the end of the 2010-11 fiscal year
2
Debt ratio on the Maastricht Treaty definition strategy insights | issue seven 1thinking the unthinkable | might there be no way out for Britain?
The deficit reduction plan, then as seems probable, growth in In addition to skewing the economy to zero for 28 months), devaluation, medium enterprises (SMEs) from the
is critically dependent upon the retailing is precluded by falling towards debt and public spending, £390bn of fiscal stimulus and £200bn onerous burden of regulation which
restoration of growth to pre-crisis real consumer incomes. Brown and his colleagues imposed of quantitative easing, all to no effect. blights their expansion.
levels. Is this actually likely to happen? ever-increasing regulatory and
a very British mess fiscal burdens on business, and The so-called ‘plan b’, which could Such reforms, whilst imperative if a
the economy – aligned Together, the severity of Britain’s simultaneously transferred resources be better labelled ‘Brown lite’, is not full-blown economic crisis is to be
against growth indebtedness and the challenging from private industry into a public worthy of serious consideration. In the averted, will be opposed by interest
Our analysis indicates that the outlook for the economy mean that the sector whose productivity was subject years prior to the recession, Britain groups, and will also cut across much
British economy, as currently aligned, UK is now mired in a high-debt, low- to continuous decline. This weakened borrowed £2.18 for every £1 of growth. of the moral absolutism that was
is incapable of delivering growth at growth trap. Minimising the inevitable the overall productivity of the Continued high borrowing would be promoted so successfully by Labour. In
anywhere near the levels required by damage requires the clearest possible British economy. nothing more than a pain-deferral many instances, choices will have to be
the deficit reduction agenda. understanding of how this situation exercise leading inevitably to a full- made between economic efficiency on
came about. Labour’s period in office was blown economic crisis. the one hand and spurious concepts of
In the decade prior to the financial characterised not just by economic ‘fairness’ on the other.
crisis, the UK economy became hugely Britain’s fiscal and economic problems and fiscal mismanagement but also As Britain’s debt-driven economic
dependent upon debt. Taking public result from grotesque mishandling by the promotion of a culture of moral misalignment unravels, property The outstanding questions where
and private components together, of the economy under the 1997- absolutism centred around spurious prices can be expected to fall sharply, Britain’s economic future are
debts have increased at an annual 2010 Labour administration. Gordon and selective concepts of ‘fairness’. unemployment to remain high, sterling concerned lie less in the mechanics
average rate of 11.2% of GDP since Brown’s reform of the financial This culture, and the accompanying to remain weak, and real incomes to of reform than in the ability of
2003. The two big drivers of the regulatory system, and his insistence sense of individual and collective continue to fall as inflation continues government to secure support
economy have been private (mortgage that the Bank of England determine entitlement, is the biggest obstacle in to out-pace earnings. for reforms which both challenge
and credit) borrowing, and huge monetary policy on the basis of retail the way of effective economic reform. preconceived notions and offend
An early objective for government vocal interest groups.
(and debt-dependent) increases in inflation alone, resulted in a reckless
damage limitation and the should be to put an end to the state of
public spending. escalation in mortgage lending.
need for supply-side reform national denial over the true condition The best way for government to offset
The ensuing property price boom
Reflecting the growth in debt-funded of the economy, and to undercut material pain would be to promote a
spurred unsustainable growth in a Courtesy of massive and unsustainable
activities, three of the UK’s eight the delusory sense of individual and ‘liberty agenda’ which, whilst freeing
plethora of housing-related sectors, public borrowing, the British public has
largest industries (real estate, financial collective ‘entitlement’ that was up SMEs to invest and to grow, would
and underwrote a rapid expansion been shielded thus far from the pain
services and construction), which fostered in the Labour years. Britain also begin to liberate the public from
in consumer borrowing. Believing of recession. This exercise in damage-
account for 39% of the economy, are has no automatic entitlement to high the results of Labour’s predilection for
that this bubble was real growth, limitation was necessarily-time
incapable of growth now that net living standards or a welfare state. surveillance and coercion.
Brown spent up to, and beyond, the limited. What comes next is going to
private borrowing has evaporated. Rather, these benefits have to be
apparent expansion in the tax base be unpleasant. At present, we see very little sign that
Another three of the top eight earned, not borrowed.
that had resulted from the property- the Coalition government is prepared
sectors (health, education, and public driven boom. Real public spending The widespread assumption that the
With all macroeconomic options to promote economic growth and
administration and defence) account increased by 53% in a period in which right blend of macroeconomic policies
exhausted, the best way to restart individual liberty by tackling Labour’s
for a further 19%, and cannot expand the economy expanded by just 17%. alone can overcome Britain’s economic
growth would be to implement supply- notions of morality, fairness and
now that growth in public spending As soon as the bubble burst, a chasm and fiscal problems is fundamentally
side reforms designed to free small and entitlement.
is a thing of the past. This means that rapidly opened up between excessive mistaken. Governments have tried low
58% of the economy is ex-growth, a spending and falling tax revenues. interest rates (which have been close
figure that could rise to 70% if,
2 strategy insights | issue seven strategy insights | issue seven 3thinking the unthinkable
might there be no way out for Britain?
contents
executive summary 1
introduction: is this the end of the road? 7
part one: the scale of the problem: mired in debt 11
much worse than it looks 11
is bankruptcy possible? 13
part two: case studies: roads to nirvana? 17
let rip – route one to disaster 17
forget ‘plan b’ 18
showing resolve – the government plan 20
the achilles’ heel – dependency on growth 21
part three: the economic outlook – aligned against growth 27
a borrowed boom – the impact of debt addiction 29
the undermining nexus – high borrowing, low growth 31
the nature of addictive borrowing 31
what happens next? 35
part four: a very British mess – the delivery of failure 39
laying the foundations for failure 40
spend, spend, spend 41
declining productivity 44
the high price of moral absolutism 46
the gravest problem – the concept of entitlement 46
the distorted economy 48
nemesis – the squeezed middle 50
part five: the search for pain mitigation – no way out? 53
meanwhile, back in the real world… 55
limiting the pain, building the foundations for recovery 57
as others see us 58
fixing the obvious 59
the high value of low-cost reforms 62
do we want economic viability? 63
needed – a liberty agenda 64
4 strategy insights | issue seven strategy insights | issue seven 5introduction
is this the end of the road?
Earlier this year, when we began our Britain is truly mired in debt then. But
research for ‘Project Armageddon’, the absolute scale of debt is far less
the working title certainly wasn’t important than the ability to service it.
intended for publication. The initial The United Kingdom’s debt mountain
proposition was that, whilst the is manageable if – and only if – strong
Coalition government was right about economic growth is to be anticipated.
the imperative need to reduce the
United Kingdom’s frightening fiscal The discovery which stripped any
deficit, its opponents, too, might be remaining hyperbole from the
right about the impact that fiscal ‘Armageddon’ title was our realisation
tightening could have on growth. We that, far from delivering strong growth,
expected to discover that Britain was in the UK economy is likely to do little
for a protracted period of low (1.5-2%) better than mark time. Though we
growth, and that the road to fiscal believe that we may have been the
sustainability might, therefore, prove first to have spotted it, the logic behind
to be a long and hard one. the implausibility of strong growth
is pretty simple, and rests upon two
Early research conformed to this calculations.
picture, revealing that the debt
numbers for the UK are frighteningly First we discovered, by combining
larger than are generally realised. Public public and private borrowings, that
sector debt, reported at £900bn, or the UK has, since 2003, borrowed an
60% of GDP at end-March, rises to £1.1 annual average of 11.2% of GDP. When
trillion (75%) on the Maastricht Treaty the Labour administration ramped
basis on which countries like Greece the fiscal deficit from 2.4% of GDP in
and Ireland are assessed. The reported 2007-08 to 11.2% in 2009-10, all that
number excludes the potential costs government was really doing was
of the financial interventions (£1.3 replacing private borrowings, which
trillion), and also excludes two big had dried up overnight.
‘quasi-debt’ obligations, which are the
Second, sector-level analysis of
commitments to pay public sector
economic output reveals that
pensions (about £1.18 trillion) and
the commanding heights of the
payments due under PFI obligations
British economy are almost entirely
(perhaps £170bn). Excluding the
dependent upon private borrowing
potential costs of financial intervention,
and public spending, the latter also
we estimate the true scale of British
debt-dependent in that the massive
public debt and quasi-debt at £2.46
ramp-up in government spending after
trillion, or 167% of GDP. Outstanding
2000 was predicated on a tax base that
private sector debt includes £1.2 trillion
never really existed.
of mortgage obligations and £210bn of
consumer credit.
6 strategy insights | issue seven strategy insights | issue seven 7thinking the unthinkable | might there be no way out for Britain?
This report is concerned with past delivered by the economy as currently Logical though this is, we fear that
The ex-growth lock-down – the commanding heights of the UK economy*
events and trends only in so far as they configured. The opposition’s calls for such reforms could be blocked by
Sector £bn %** Key factors reveal how Britain got itself into the a ‘plan b’ based on a more gradual vested interests and by the ‘must-
1 Real estate £299 23.8% Mortgage issuance has collapsed crippled periphery and may thereby approach to deficit reduction amount have’ entitlement culture built up
suggest the possible outlines of a to nothing more than a recipe for on a foundation of spurious moral
4 Finance £126 10.0% Significantly linked to borrowing absolutism.
reform agenda designed to minimise more denial and an accelerated lurch
5 Health £94 7.5% Public sector – spending flat the forthcoming pain and avert a debt into crisis.
disaster. The conduct of the economy Is there a sufficient sense of realism
6 Education £77 6.1% Public sector – spending down The reality is that the cupboard is left in the body politic? If there is, a
under ‘Team Brown’ was a tale of
7 Construction £73 5.8% Mortgage collapse, spending cuts grotesque incompetence which began bare where macroeconomic policy is return to viability might be possible
in hubris and ended in blame-shifting. concerned. Massive stimulus, totalling even at this late stage.
8 Public administration and defence £65 5.2% Public sector – spending down
Just as pertinently, where the future £590bn and equivalent to 40% of GDP,
£733 58.4% has been tried, and has failed to deliver But if, as we strongly suspect, there is
outlook is concerned, New Labour
any growth at all. Interest rates are not, then this may be the end of the
2 Retail £140 11.2% Declining consumer incomes peddled a spurious moral absolutism
already at rock-bottom. Fiscal stimulus road, and there really may be no way
and created an almost surreal sense of
£873 69.6% looks impossible with Britain boxed in out for Britain.
individual and collective entitlement,
and it is this blend of moralism and to a high-debt, low-growth trap.
Source: * Tullett Prebon UK Economic & Fiscal Database Public sector
** Shares of the economy by GVA, 2009 Private sector entitlement which is the largest
If an escape route does exist at
single stumbling-block on any road to
this very late stage, it lies not in
Three of the eight largest sectors of the Now that private borrowing has A combination of high debt and low economic viability.
macroeconomic strategy but in supply-
economy – real estate, construction evaporated and the age of reckless growth means that the UK is a fully-
Both the government and its side reform. Businesses in the UK are
and financial services – have enjoyed expansion in public spending is over, fledged member of Europe’s debt-
opponents seem to believe that the crippled by government interference
huge growth fuelled overwhelmingly these sectors, accounting for 58% of shackled periphery, and this puts a Dr Tim Morgan
delivery of recovery requires nothing and by the excessive demands of
by private borrowings. These three the economy, are poised to shrink, not wholly new complexion on the outlook Global Head of Research
more than the selection of the right the state machine. The only way to
sectors alone account for 39% of grow. Declining disposable incomes for what is still one of the world’s Tullett Prebon plc
blend of macroeconomic policies. deliver growth would be to unshackle
economic output. Another three of suggest that retailing, which accounts largest economies. Unless growth is
This report seeks to demonstrate enterprise and transfer resources to July 2011
the ‘big eight’ sectors (accounting for for a further 11% of output, may also restored briskly (which we regard as
that no such magic formula exists. the private sector, a process which
a further 19%) are health, education, be poised to contract. All told, then, highly implausible), it can be only a
The Coalition’s deficit reduction plan, would require reductions in public
and public administration and defence, the UK is in an ‘ex-growth lockdown’, matter of time before the markets and
though laudable in its intent, is set spending which go much further than
each of which has grown as public with as much as 70% of the economy the rating agencies start to put serious
to fail because it is predicated upon anything thus far contemplated by
spending has ballooned. incapable of growth and very probably upwards pressure on British debt
levels of growth which cannot be the government.
poised to shrink. yields. When that happens, sterling
will be very much at risk.
8 strategy insights | issue seven strategy insights | issue seven 9thinking the unthinkable | might there be no way out for Britain?
part one:
the scale of the problem
mired in debt much worse than it looks economies such as Greece, Portugal
and Ireland, it would be folly to assume
• The real level of British indebtedness At different times, American
is widely misunderstood. The 75% investment gurus Jim Rogers and Bill that this immunity can continue.
reported public debt ratio excludes Gross have both expressed ultra-
At first sight, fears such as those
quasi-debt obligations which lift bearish views on the prospects for
articulated by Rogers and Gross
the total to 167%, and even this Britain, the former opining that the UK
can seem melodramatically over-
number excludes huge potential is “finished” and the latter commenting
blown, since official public debt is a
commitments created by financial that British public finances (and, by
significantly smaller fraction of GDP
interventions. Together, mortgage extension, sterling) rest on “a bed
in Britain than in known basket-cases
and consumer debt total a further of nitro-glycerine”. Allowing for the
such as Greece and Ireland. According
97% of GDP. hyperbole in both statements, the
to official figures, UK government debt
reality is that the UK is indeed mired
currently stands at £900bn, equivalent
• These levels of debt are sustainable in debt, even though the true extent
if, and only if, the deficit is brought to 60% of GDP. Government projections
of British indebtedness is sometimes
under control and strong economic (which assume that the deficit will
less than obvious in published data.
growth is achieved. A failure to be reduced from 9.7% of GDP last
Though the hidden nature of much of
deliver both of these objectives year to 1.6% by 2015-16) show the
the British debt mountain has helped
could result in a debt disaster. nominal level of debt continuing to
prevent markets from bracketing the
rise (reaching £1.28 trillion by 2016),
UK with other European peripheral
Fig. 1: Debt and estimated quasi-debt* Fig. 2: Evolution of public debt*
£ trillion As % GDP
£4 Interventions
200% PFI
2011, 167%
PS pensions PS pensions
PFI Treaty debt
Public debt** Reported debt
£3 150%
2006, 103%
£2 100%
£1 50%
£0 0%
Debt GDP 06 07 08 09 10 11 12 13 14 15 16
Sources: * Official data and Tullett Prebon estimates *Source: Official data and Tullett Prebon estimates. Excludes effects of financial sector interventions
** Debt on Treaty basis
10 strategy insights | issue seven strategy insights | issue seven 11thinking the unthinkable | might there be no way out for Britain?
though both inflation-adjusted debt The reality, moreover, is that published out of the contributions of current debt and quasi-debt stands at about of £390bn were incurred in the space which has recently reached new highs.
and the debt/GDP ratio should top out numbers very materially understate workers with the Treasury making up £5 trillion (340% of GDP), and even this of three financial years, pushing the The trade deficit exacerbates the
in 2013 at £1.1 trillion, or 70% of GDP. true indebtedness (fig. 1). For a start, any annual difference. The current understates the true scale of national reported debt ratio up from 37% to problem of servicing Britain’s huge
For the foreseeable future, then, British public debt on the stricter Maastricht unfunded public sector pension indebtedness because it excludes 60% of GDP. external debts.
public debt is expected officially to Treaty definition (on which the debts obligation stands at about £1,180bn, the very substantial corporate debt
remain at historically high levels, but of Eurozone members such as Greece to which can be added perhaps £170bn incurred in the era of easy money, The third, equally-critical point is Britain’s greatest asset, in terms of
to stay well short of the 100% barrier and Ireland are judged) is already £1.11 of outstanding commitments under PFI ‘private equity’ and leveraged buy-outs. that national solvency is dependent earning the foreign exchange with
at which, at least in theory, some trillion, or 75% of GDP. And, according (private finance initiative) contracts. upon generating sufficient economic which to pay for imports of food,
form of bankruptcy begins to look to the ONS, debt including the effects Equally worryingly, UK external debt, output and government revenue to energy and other essential goods and
a distinct possibility. of financial sector interventions now All told, then, we estimate total at 400% of GDP, is far higher than that service what are, by any standards, services, is the City of London, but
stands at £2.24 trillion (147% of GDP). public debt and quasi-debt at of countries such as Portugal, Greece or uncomfortable levels of government the political climate for the sector is
Even if the published debt figures were £3.6 trillion3, equivalent to 244% Spain (fig. 3), and equates to $143,000 and wider national debt. adverse. Bankers have been blamed for
a realistic representation of public Nor is this all. The increase in the of GDP or more than £135,000 for for each man, woman and child in the financial crisis (for which the real
sector indebtedness (which they are public sector wage bill over the last every British household. This, of Britain (fig. 4), again far higher than in For reasons which will be explored culprits were the policymakers who
not), alarm bells should be ringing at decade has caused a rapid escalation course, excludes private debts such most other developed countries. later, we very much doubt whether the crippled regulatory oversight), and
the sheer pace at which this debt has in unfunded pension obligations. The as mortgages (£1.2 trillion) or the real possibility of national bankruptcy criticised because they earn too much
been accumulating – 43% (£390bn) of British system of providing pensions consumer debt that escalated under Is bankruptcy possible? has yet entered the collective psyche. (which, as we have remarked before,
all outstanding public debt has been for government employees has always the easy money conditions of the Even at the levels revealed here, debts But, and as we shall also see, the era is about as rational as supporters of
taken on in the space of just three been something of a Ponzi scheme, Labour years and currently stands at do not of themselves augur bankruptcy of comforting self-delusion is nearing a football club demanding the sale
financial years. the pensions of retirees being paid £210bn. Together, private and public or some form of default, because the its expiry date. Unless drastic action of their top goal-scorer because he
absolute scale of a country’s debts is is taken – and, critically, unless a earns so much more than they do). The
less important than the ability of the satisfactory level of economic growth emotional debate over banking tends
economy to service these debts and to can be restored – markets are likely to to obscure the reality that for Britain
Fig. 3: External debt to GDP* Fig. 4: External debt per capita* wake up to the reality that Britain has
repay them when they fall due. to downsize its financial services
more in common with Greece than industry would be about as rational as
External debt as % GDP External debt per capita Even so, three things are already with Germany. And, when markets do Saudi Arabia downsizing oil, or Iceland
450% $160,000 abundantly clear. The first is reappraise Britain’s viability, a number downsizing fish.
398% $143,242
400% $140,000 that the UK economy and public of significant adverse factors are likely
350% finances have been managed with to be taken into account. As for selling assets, the state cupboard
$120,000
300% staggering incompetence – for sheer is all but bare, and a huge swathe of
$100,000
mismanagement, profligacy, and Britain’s external debt is a particularly private sector assets (such as water
250%
$80,000 hubris, we know of no modern acute problem because of the UK’s suppliers, power generators and
200% persistent trade deficit, a problem
$60,000 parallel for the trashing of the British airports) is already foreign-owned.
150% which has not been fixed by the sharp
economy in the decade prior to the
$40,000
100%
financial crisis. devaluation of sterling. The cushion When considering the question of
50% $20,000 formerly provided by exports of North what is colloquially called ‘bankruptcy’,
0% $0 Second, it is equally clear that Sea oil and gas has long since gone, it is necessary to distinguish between
UK POR FRA GRE ESP GER ITA AUS US CAN JP UK POR FRA GRE ESP GER ITA AUS US CAN JP government cannot go on adding to and energy imports are set to rise insolvency (when liabilities exceed
its debt pile at anything remotely like further as domestic production tails assets) and illiquidity (when the
the rate that has occurred in the period off. Britain is also heavily dependent borrower becomes unable to meet
*Source: CIA World Factbook *Source: CIA World Factbook. Countries ranked by gross external debt as % GDP
since 2008, when net new borrowings upon imports of food, the price of ongoing funding requirements, which
3
Treaty debt (£1106bn) + financial interventions (£1113bn) + pension obligations
12 strategy insights | issue seven (£1180bn) + PFI commitments (£170bn) = £3,569bn strategy insights | issue seven 13thinking the unthinkable | might there be no way out for Britain?
include interest payments and the British banks are able to operate in At present, these risks have been refusing to bear out this argument, the
repayment of expired fixed-term debt). global markets because it is assumed averted, in no small part because of main outcome of devaluation thus far
The concept of insolvency has little that they are viable, and it is further the change of government in May being a disquieting take-off in inflation.
meaning in national terms, because assumed that government would bail 2010. There have, however, already
most of any country’s asset base (such them out if it turned out that they been some disturbing signs, such Currency independence aside, the
as its housing stock) is effectively were not. Businesses and citizens can as the creation in 2009 of £200bn single most significant difference
unsalable, which means that assets undertake international transactions through quantitative easing (QE), the between Britain and these known
are impossible to value. because international markets trust current euphemism for the printing basket-cases is the sheer scale of the
sterling, which really means that of money. When QE was used, the public debt. The quantum of British
National or government illiquidity, they trust the British government. Treasury vigorously denied that it was public debt dwarfs those of Ireland,
however, is all too real a possibility Everything, then, hinges on belief. A monetising debt (which is forbidden Greece or Portugal. Many observers
under certain conditions, and has in key assumption made by the current under the terms of the Maastricht believe that a Spanish debt crisis could
the past impacted many countries government is that continuing with Treaty), but the use of virtually all of be a bridge too far for the bailout
whose behaviour has been no more the debt trajectories of recent years the £200bn to purchase gilts from mechanisms, yet Spain’s public debt
reckless, and whose governments have would put that belief into jeopardy. institutions which were bound to (of about £550bn) is very much smaller
been no more inept, than those of the reinvest the proceeds in buying than that of Britain.
UK over the last decade. The heralds of bankruptcy, though newly-issued gilts made the difference
difficult to combat, are relatively easy Having established that bankruptcy
between QE and debt monetisation
When looking at the issue of illiquidity, to predict. First, we would anticipate is by no means inconceivable for a
little more than technical fig-leaf.
we need to bear in mind that national ratings downgrades if Britain fails country which has mired itself in debt
Any repetition of QE could have
economic viability is really an issue to deliver progress both on deficit whilst persistently living far beyond
extremely serious repercussions in
of credit, a matter of trust and belief. reduction and on economic growth its means, we need to look at some
the bond markets.
Currencies such as sterling are fiat within a timescale that may now have case studies of what might happen if
money, which means that their shrunk to as little as twelve months. Perhaps the single most worrying the UK does, or does not, get its deficit
value lies not in intrinsic worth or A second sign of impending illiquidity feature of the current situation is that under control. We start with the ‘route
convertibility (into, say, gold), but in would be a ‘strike’ in both domestic persistent minimal growth may cause one’ journey to bankruptcy, which
the faith that is placed in the ability and international debt markets, and a global market participants to gravitate would involve a policy of denial and an
of the issuing government to meet third would be a further sharp fall in towards a new perspective in which unwillingness to stop piling up public
its commitments. the value of sterling. Britain is seen not as a weaker version debt at the unsustainable levels of the
of Germany but rather as a peripheral recent past.
Much the same applies to national If this process were to occur, interest country in the mould of Greece, Ireland
debt and, by extension, to private rates would climb rapidly (which would or Portugal. Thus far, Britain’s debt
debt as well. The UK government is itself undercut economic performance yields have remained strong because it
able to borrow from abroad because very severely), the cost of vital imports is assumed that the ability to devalue
international lenders trust it to repay would soar, inflation would escalate can be used to promote economic
what it has borrowed, and to do so and Britain could be subjected to a growth, but the facts are stubbornly
in a currency whose value has not huge flight of capital.
been ravaged by excessive inflation.
14 strategy insights | issue seven strategy insights | issue seven 15thinking the unthinkable | might there be no way out for Britain?
part two:
case studies
roads to nirvana? a 9.6% reduction which is equivalent Under this scenario, the total deficit
• The Coalition government rightly to £134bn at current values. Before rises, because interest costs surge as
believes that continuing to run deficits looking at how this might or might debt escalates (fig. 5). From 3% of GDP
at anything remotely similar to recent not work, we need to consider the in 2010-11, interest absorbs 5% by
levels would be a recipe for disaster. implications were Britain to go back 2014-15, 7% by 2018-19 and 10% by
on this programme and, instead, to 2021-22. Needless to say, public debt
• But the deficit reduction plan can only continue to run deficits at the reckless soars, rising from 75% of GDP today to
work if the British economy achieves levels of recent years. 100% in 2014, 150% in 2020 and 200%
very rapid real rates of growth. in 2025 (fig. 6).
During 2009-10, the primary deficit
let rip – route one to disaster (which excludes interest paid on public Long before the latter date, the
Cognisant of the risks which would debt) was £125bn, or 8.9% of GDP. To government would have been forced
be posed by any further escalation in evaluate the concept of sustaining into some form of default. On this
public debt, the Coalition government growth by continuing to run large projection, by 2014-15 the DMO
has laid out a programme of fiscal deficits, we have projected this primary (Debt Management Office) would be
tightening which is designed to reduce deficit forwards. We further assume, trying to raise (at current values) a
the budget deficit from 11.2% of perhaps somewhat generously, that net £250bn, of which £90bn would
GDP in 2009-10 to 1.6% by 2015-16, growth conforms to the OBR forecasts. be required simply to pay interest on
outstanding debt.
Fig. 5: Recklessness – the deficit* Fig. 6: Recklessness – debt*
Deficit as % GDP Debt as % GDP
45% 500%
Interest
40% Primary deficit
35% 400%
30%
300%
25%
20%
200%
15%
10% 100%
5%
0% 0%
2006 2012 2018 2024 2030 2036 2006 2012 2018 2024 2030 2036
*Source: Tullett Prebon calculations *Source: Tullett Prebon calculations
16 strategy insights | issue seven strategy insights | issue seven 17thinking the unthinkable | might there be no way out for Britain?
Once debt begins to take off in this way, Various shifts and expedients deep negative equity. Britain’s public
the borrower – in this instance, the would, no doubt, be employed in an debts are orders of magnitude larger
British government – rapidly finds itself increasingly desperate attempt to keep than those Greece, Ireland or Portugal,
being drawn into a vortex. Even without the fiscal ship afloat. The monetising which would in all probability make an
increases in interest rates, deficits and of debt through resumed QE would outside rescue impossible.
total debt take off exponentially as a doubtless be tried, with an acceleration
result of the compounding effect of in inflation accepted as a necessary We have described here the implications
accumulated interest commitments. evil because it would destroy the real of sustained high primary deficits at
The reality is that this process would value of outstanding debt. The interest some length, but one word would
be exacerbated by rises in interest rates rates paid by government would suffice – catastrophe.
which would inevitably be imposed by escalate, the pound would crash, and
forget ‘plan b’
the market as the vortex process gained so would property markets as soaring
recognition. As rates rose, the spending rates savaged affordability. A large Of course, the government’s opponents
capability of consumers would slump, proportion of Britain’s 11.4 million would argue, quite rightly, that they
whilst inflation would surge in response mortgage-payers would be reduced to would not for a moment suggest
to a crumbling of sterling. penury by the resulting combination of prolonging a primary deficit of
unaffordable monthly payments and anything like 8.9% of GDP. If the
Fig. 7: Borrowing and growth – the impact of diminishing returns
£bn at constant 2010-11 values
£250
Debt change
GDP change
£200
£150
£100
£50
£0
97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11
-£50
*Source: Tullett Prebon calculations
18 strategy insights | issue seven strategy insights | issue seven 19thinking the unthinkable | might there be no way out for Britain?
opposition were in office, we believe There is no point whatever in borrowing wholly unsustainable fiscal mess. This project has required us to assess fig. 8) and public debt falling rapidly issue of public spending, but we turn
that they would seek to reduce the £2.18 to create £1 of growth, which is Between 1999-2000 and 2009-10, the timescales that are a great deal longer thereafter. If this very rosy scenario next to critics’ accusations that the
budget deficit from the 9.6% recorded precisely what happened between Labour government had increased than those set out in official forecasts. were to eventuate, it is highly probable government’s fiscal policies are tied
in 2010-11 to perhaps 5% by 2015-16. 2001-02 and 2007-08. real-terms public spending by 53%, Where the official-basis outlook is that government would moderate to a growth scenario that, particularly
from £440bn (at 2009-10 values) to concerned, we have assumed that the its plans to something closer to fiscal given the scale of retrenchment, is far
This, the so-called “plan b”, would The inability of the economy to respond £669bn. Once the financial crisis burst 2015-16 projections both for growth neutrality, gradually reducing taxes, too optimistic.
not work, for three main reasons. to stimulus has been demonstrated in the ‘Brown bubble’, the result was a (2.8%) and for the nominal rate of and/or increasing spending, once the
First, even the very modest real-terms spades since the onset of the banking deficit of £156bn (11% of GDP) and an expansion of GDP (5.6%) continue debt ratio started to decline (fig. 9). the achilles’ heel –
spending reductions planned by the crisis in 2008. During 2008-09 and unsustainable surge in borrowings. throughout our forecast period. We dependency on growth
government have provoked hostile 2009-10, the Labour administration further assume that revenue remains Government argues that this Opponents of the government make
responses based almost entirely on incurred deficits of £250bn and injected The Coalition plans to reduce the at the same (38.4%) proportion of GDP optimistic scenario more than justifies many different criticisms of the
naked self-interest, and a government a further £200bn through QE, but this deficit to 1.6% of GDP by 2015-16 projected for 2015-16, and that public a period of adjustment in which the budget tightening programme, but
following the opposition plan, having truly massive stimulus (equivalent to through a combination of significantly spending (other than interest expense) pain has, in any case, been exaggerated by far the most telling is that fiscal
given way once, would be subjected to 32% of GDP) delivered extraordinarily higher tax revenues and slightly lower is held constant in real terms. by critics who are stretching credulity adjustment on the scale planned
severe pressure from selfish interest modest returns in terms of growth. expenditures. With the exception of when they describe as ‘massive’ by the administration will undercut
groups. Second, a more gradual In the Coalition’s first year in power, a the planned job-destroying increase On this extrapolated basis, the fiscal planned real-terms spending growth because it will take far too
approach to deficit reduction would further £140bn was borrowed, lifting in National Insurance contributions, deficit falls rapidly, with the budget reductions of just 3%. Later in this much demand out of the economy.
create rises in interest costs over and the total stimulus to £590bn, but the the coalition has accepted Labour’s tax moving into surplus by 2017-18 (see report we look more closely at the
above those already anticipated, and economy is currently doing no more hikes and, in addition, has raised the
these costs would exert a crowding- than flat-lining. rate of VAT from 17.5% to 20%. Between
out effect on other categories of public 2009-10 and 2015-16, taxation is
showing resolve – the Fig. 8: Eliminating the deficit Fig. 9: Driving down debt
spending. In any case, it is highly projected to rise from 36.8% to 38.9% of
probable that a gradual reduction of government plan GDP, yielding an anticipated 22% real-
Deficit as % GDP Debt as % GDP
the deficit to 5% simply would not be Given the potentially lethal terms increase in revenue.
enough to head off ‘vortex risk’. characteristics of a ‘debt vortex’, the 15% 90%
Budget extrapolated
government’s decision to bear down Over the same period, total public 80% Budget moderated
10%
Third, it is by no means certain that on deficits through big increases in spending is set to decline by 3% in real- 70%
continuing with higher public spending terms, and to shrink from 48% of GDP 5%
tax revenue and more modest cuts in 60%
for longer would deliver the growth public expenditures obviously makes a to 40%. Nominal public debt (excluding 0% 50%
that its advocates ritually claim. For financial interventions) will continue
2006
2012
2018
2024
2030
great deal of sense. The government is 40%
-5%
a start, a pattern which has emerged right in its analysis of the problem but to rise throughout the period, from
Budget 30% Budget
since 2001, and is discussed later in this wrong, we believe, in how it believes £1,000bn in 2010 to £1,530bn in 2016, -10% forecast forecast
20% period
report, is for economic growth to fall that the numbers will actually pan out. but real-terms debt will be essentially period
-15% 10%
a long way short of increases in debt flat from 2012. Debt as a proportion
(fig. 7). The debt data shown in fig. 7 The outlook, as presented by the of GDP will begin to fall very gradually -20% 0%
2006 2012 2018 2024 2030
is a combination of private and public government, is for a period of painful after 2012, but will remain far higher
borrowing but, as private borrowing has adjustment followed by much- in 2016 (80%) than in 2010 (71%), let
now dried up, government would have improved economic performance. alone 2008 (44%). *Source of charts: Tullett Prebon projections *Source of charts: Tullett Prebon projections
to carry the entirety of any borrowing The Coalition administration argues,
burden going forward. quite correctly, that it inherited a
20 strategy insights | issue seven strategy insights | issue seven 21thinking the unthinkable | might there be no way out for Britain?
Fig. 10: Contributions to planned deficit reduction
£bn at constant 2010-11 values
£250
£200 +£25 -£31
£160 -£84
£150
£100
-£44
£50 £26
£0
2009–10 Interest Tax rates Revenue growth Spending 2015–16
*Source: Tullett Prebon calculations
It is certainly true that the £84bn) created by growth in the size To its lasting credit, the Coalition
government’s fiscal calculations are of the economy and some declines government has created the
hugely growth-dependent. In figure in ‘automatic stabiliser’ spending independent Office for Budget
10, we break out our estimates of resulting from lower unemployment Responsibility (OBR), so that
contributions to the planned reduction and household benefits dependency. chancellors can no longer make
in the budget deficit, expressed at the numbers add up by the simple
constant 2010-11 values. Tellingly, the government plans to expedient of plucking the necessary
increase the incidence of taxation by growth projections from the ether. In a
The government’s plan is to reduce 1.9% of GDP (which is worth about report which accompanied the recent
the real-terms deficit from £160bn £31bn) but expects revenues to Budget, the OBR set out its economic
in 2009-10 to £26bn in 2015-16, increase by a total of £115bn at 2010- assumptions in considerable detail.
a targeted reduction of £134bn 11 values, the balance of this increase
which increases to £159bn when the being delivered by economic growth. Principally, the OBR expects real
anticipated £25bn real-terms increase economic growth to reach 2.9% by
in debt interest is taken into account. Since economic expansion is assumed 2012-13, with CPI inflation falling
Our calculations suggest that the to deliver a majority of the resources back to the target rate of 2% over
overwhelming bulk of this is expected for fiscal tightening, what levels of the same period. Supported by the
to be delivered by growth. This growth are required, and how likely is assumed achievement of strong
comprises revenue expansion (of it that these assumptions will be borne growth, unemployment is expected to
out by events?
22 strategy insights | issue seven strategy insights | issue seven 23thinking the unthinkable | might there be no way out for Britain?
decline briskly, a factor which would higher in 2014-15 than in 2009-10, in 100% of GDP and, critically, would still be
Fig. 11: Growth risk – the deficit Fig. 12: Growth risk – debt
ease the pressure on government comparison with the 16% assumed by increasing (fig.12), putting interest costs
welfare spending. the government. on an upwards trajectory.
Deficit as % GDP Debt as % GDP
Unfortunately, these forecasts appear If this were to happen, the government’s Such a scenario poses a clear threat 14% 140%
Budget Budget
to be extremely optimistic. We believe fiscal plans could indeed begin to unravel of ‘vortex risk’, which involves (a) Low growth Low growth
12% 120%
(and explain in the next chapter of this in pretty much the manner that its borrowing to meet debt service costs,
report) that the British economy simply opponents predict. Instead of expanding and/or (b) cutting other spending 10% 100%
is not capable of growing at anything by a real-terms £115bn, tax revenues by more than is currently intended 8% 80%
like the rates which are predicted by the would increase by only £50bn, putting in order to accommodate higher
6% 60%
OBR and are critical to the government’s a £65bn hole in the deficit reduction interest payments within previously-
deficit reduction calculus. objective. Higher-than-expected planned levels of expenditures. As debt 4% 40%
spending on benefits could cost £11bn, escalates, the cost of borrowing can
In order to assess the deficit 2% 20%
and higher interest expense could absorb be expected to rise, turning the debt
implications of lower growth, we an additional £13bn. Instead of reducing problem into a vortex. 0% 0%
have assumed that annual rates of the deficit by £134bn, tightening of
2006 2011 2016 2006 2011 2016 2021
growth are half of those projected by only £45bn would be achieved, leaving The government’s plan, then, depends
the OBR. On this basis, trend growth is the deficit at over 8% of GDP (fig. 11). upon the delivery of robust growth.
*Source: Tullett Prebon calculations
1.4%, and real economic output is 8% Treaty debt would have risen to over Can this happen?
24 strategy insights | issue seven strategy insights | issue seven 25thinking the unthinkable | might there be no way out for Britain?
part three:
the economic outlook
aligned against growth The Coalition government and its What needs to be borne in mind from
opponents differ on many issues, but the outset is that a return to satisfactory
• Expectations for a return to strong
growth ignore the fact that the they seem to agree over the general levels of growth is simply an assumption,
British economy has become outlines of Britain’s parlous economic not a demonstrable fact.
dependent upon private borrowing and fiscal condition. Conventional
logic states that government deficits Assessment of purely public borrowing
and public spending. Since 2003,
only really took off in 2008-09, when seems to bear out the consensus
annual additions to aggregate
there was a very sharp downturn interpretation. During the period 1999-
private and public debt have
in economic output. The Coalition 2000 to 2007-08, when trend growth
averaged 11.2% of GDP, whilst public
and Labour disagree on why the was 2.8%, deficits averaged just 1.8%
expenditures have escalated.
downturn happened – was it domestic and only once exceeded 3%. Not until
the economy deteriorated sharply
• The combination of private mismanagement, or was Britain
borrowing and public spending has battered by global events over which during 2008 did the deficit escalate. It
skewed the economy to the point it had no control? – and they further looks like a classically Keynesian picture.
where between 58% and 70% of disagree on the necessary pace and
But this widely-accepted interpretation
output is dependent on these inputs, scale of deficit reduction. But the
is fundamentally flawed, because it
both of which have now gone into general consensus seems to be that,
leaves a critical component out of the
reverse. This means that delivering whilst deficits at recent levels are
equation. That component is private
significant economic growth has unsustainable, a return of growth will in
borrowing, shown in fig. 14 as secured
become very difficult indeed. due course resolve Britain’s problems.
Fig. 13: Keynesian? Deficits and growth, 1996-97 to 2009-10*
As % GDP
12%
Deficit
10%
Growth
8%
6%
4%
2%
0%
-2%
96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10
-4%
-6%
*Source: Tullett Prebon UK Economic & Fiscal Database
26 strategy insights | issue seven strategy insights | issue seven 27thinking the unthinkable | might there be no way out for Britain?
Even without the corporate domestic lending from international least 10% of GDP year after year, the
Fig. 14: The bigger picture – government and private net borrowing since 1996*
component, however, a key feature of wholesale markets, a process which not overwhelming bulk of which has been
the British economy since 2003 has only contributed to a massive escalation sourced from overseas. Government
As % GDP
been the emergence of long-term in gross external debt (from £1.9 trillion debt escalation may have been a
16% dependency on borrowing at least 10% at the end of 1999 to £6.4 trillion by recent phenomenon, and one that the
Credit
14%
Mortgages
of GDP, year after year. end-2008) but put the banking system Coalition is determined to eliminate,
11.2%
12% Government (deficit) into an immediate crisis when, in 2007, but national debt addiction has a longer
Average 2003-10
Moreover, the overwhelming majority the supply of wholesale debt dried up history, and a much more worrying one.
10%
Average 1996-2001 of this borrowing came from overseas, virtually overnight.
8%
4.9% because the domestic savings ratio The critical economic role played
6% collapsed under the double onslaught a borrowed boom – the economic by debt is reflected in divergences
4% of the pensions tax grab and interest impact of debt addiction between the performances of different
2% rates which remained far too low to What we have seen, then, is that the business sectors. By the 2007 high-
provide any incentive to save rather UK has become debt-dependent over point of the ‘Brown bubble’, the
0%
than to borrow. During the boom years, the last decade, with government and real-terms economic contribution of
-2%
96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 British banks customarily funded their individuals collectively borrowing at the financial services industry had
-4%
*Sources: Tullett Prebon UK Economic & Fiscal Database, Bank of England, ONS Fig. 15: A skewed boom – real output by industry, 2007 vs 2000*
Changes in real GVA, 2007 vs 2000
(mortgage) and unsecured (credit) What really happened in 2008, then, of GDP and, with the single exception
borrowing by the public. was less a matter of intervention of the 2008-09 crisis year (7.8%), annual Financial services; +91%
Health and social services; +34%
per se but of government stepping borrowing never fell below 10.4%.
When this private component is Construction; +47%
in to sustain the aggregate level of
factored in, a wholly new picture This dependency on borrowing would Education; +26%
borrowing once mortgage and credit Real Estate; +31%
emerges. Though government expansion collapsed. The expedient of be even more pronounced were it
Public administration & defence; +23%
borrowing did not escalate until 2008, replacing private with public borrowing possible to identify the purely domestic
GDP; +19%
aggregate (private and government) was always time-limited and has now component of escalating corporate Wholesale & retail; +14%
borrowing was high throughout the reached end-point, but there has been indebtedness in the era of leverage and Transport & storage; +9%
period beginning in 2002-03. During no recovery at all in private borrowing. private equity. The tax system favoured Electricity, gas & water; +15%
the pre-crash years (2003-08), private debt capital over equity because Oil & gas; +6%
borrowers added to their debts at an Taking government and private interest expense was (and remains) Agriculture, forestry & fishing; -16% Sectors in red are wholly or
Manufacturing; -14% predominantly in the public sector
annual average rate of 9% of GDP. The components together, it becomes tax-deductible, whereas dividend
Other mining & quarrying; -10%
previously-abundant supply of private apparent that borrowing has become payments are not.
lending was then cut off abruptly a way of life over the last decade. -40% -20% 0% +20% +40% +60% +80% +100% +120% +140%
when the financial crisis hit, with net During 1996-2002, aggregate public
private borrowing falling from £114bn and private borrowing averaged 4.9% of
*Source: Tullett Prebon UK Economic & Fiscal Database
(8% of GDP) in 2007-08 to just £16bn GDP. Between 2003 and 2010, however,
(1%) in 2008-09. aggregate borrowing averaged 11.2%
28 strategy insights | issue seven strategy insights | issue seven 29thinking the unthinkable | might there be no way out for Britain?
poses major problems given that the during 1996-2002 to 11.2% between If Britain’s economy had indeed
Fig. 16: Disparate growth, 2000-09*
government’s fiscal rebalancing plan 2003 and 2010), growth rates dropped become dependent upon annual
is entirely dependant upon growth rather than improving. debt increments exceeding 10% of
Real values indexed, 2000 = 100 reaching at least 2.8% in less than two GDP, why was there not at least some
50
years from now. The implication, which is that improvement in growth rates? The
Construction, real estate & finance +42
Public sector borrowing-addicted Britain gained conundrum is one that asset managers
Economy
+28
If this doesn’t happen – and we are ever less growth from each successive call ‘returns on capital employed’ –
All other industries
25 convinced that it can’t – the deficit increase in debt, is amply borne out by Great Britain plc has increased its
+15 reduction plan will come apart at fig. 18, which shows a huge divergence capital (debt) base very markedly
the seams. between real rates of growth in without generating any improvement
0 aggregate debt and in GDP. at all in income growth. Why?
-5 the undermining nexus – high
borrowing, low growth After 2000-01, and just as borrowing the nature of addictive borrowing
In fig. 17, we revisit annual increments began to escalate, growth stagnated,
To understand the conundrum posed
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
to government and private debt by showing no gains whatsoever over the
by a growing capital (debt) base and
superimposing real GDP growth rates preceding (1996-2001) period. Indeed,
diminishing growth, we need to
onto the chart. The disturbing feature trend growth was a lot lower during
*Source: Tullett Prebon UK Economic & Fiscal Database. ‘Public sector’ = Education + Health + Public Administration & Defence distinguish between two types of debt.
of this chart is that, just as incremental 2002-08 (2.6%) than it had been in the
These are termed ‘self-liquidating’ and
borrowing escalated (from 4.9% of GDP earlier period (3.5%).
‘non-self-liquidating’ debt.
increased by 91% in just seven years, public spending sectors, from all other for 18.8% of the economy) are in the
whilst manufacturing output had industries, and indexes the real value public sector, and have been powered
declined by 14%. Two other borrowing- of output between 2000 and 2009. by an era of spending growth which
Fig. 17: Borrowing and growth #1 – opposite directions*
related sectors, construction and real is well and truly over. Real estate and
estate, increased their output by 47% Over that period, CREF output construction (29.6%) are leveraged to
and 31% respectively. Tellingly, of the six increased by 42%, and the public sector net mortgage lending, which collapsed As % GDP
fastest-growing sectors, the other three component by 28%, compared to a from £113bn in 2007-08 to just £3bn 15% 30%
were all in the public sector – health 5% decline for other industries within last year. Financial services, though
Credit
Mortgages 25%
(+34%), education (+26%), and public overall economic expansion of 15%. not wholly dependant on private 10%
Government
administration and defence (+23%). As we explain later, we estimate that borrowing, are nevertheless linked to Growth (RH scale) 20%
compound growth of 2.8% between private financial activity. Collectively, 5%
15%
In practical terms, it is not possible 2000 and 2008 would have been this means that 58% of the economy is
to draw a hard and fast distinction barely 1.4% in the absence of 0% 10%
accounted for by sectors which are, at
between ‘bubble’ and ‘non-bubble’ ‘Brown bubble’ borrowing. best, ex-growth. With real disposable 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 5%
industries. But, in an endeavour to incomes declining, retailing – another -5%
draw some very general ‘bubble’ More importantly when looking ahead, 0%
11% of output – will struggle even
and ‘non-bubble’ distinctions, fig. 16 six of the eight largest sectors of the -10% -5%
to stand still, lifting the ‘ex-growth’
strips out construction, real estate UK economy are dependant either
proportion of the economy to 70%. The
and finance (‘CREF’), and the principal on private borrowing or on public
mathematical implausibility of growth
spending. Three of these (accounting *Sources: Tullett Prebon UK Economic & Fiscal Database, Bank of England, ONS
30 strategy insights | issue seven strategy insights | issue seven 31You can also read
