The UK’s government debt reconsidered

Moody’s recently warned the UK that “further macroeconomic or fiscal shocks” might jeopardise its AAA rating, and that “the government must stick to its deficit-reduction program.”

This is concerning since, as I’ve previously noted, George Osborne has very little room to manoeuvre when looking at overall government debt and revenue.

How did we get into this mess? While the global financial crisis is partly to blame, its worth a look back to see how the UK racked up it’s debt. The chart above shows, for the period 2000 to 2011, quarter by quarter percentage changes in gross government debt for the UK. I’ve included the 27 EU member states (less the UK) for comparative purposes. The chart is divided into two periods, one referencing the Brown / Blair years and the other for David Cameron’s brief stewardship of the UK economy.

For the period in question, some 45 quarters, the 27 EU member states (less the UK) increased debt 38 times and decreased it seven times. The UK increased debt 27 times and decreased it 18. All good, one might be inclined to think. But, as they say, size matters. The 27 EU member states (less the UK) increases in debt averaged 1.58%, whilst the UK’s averaged 4.4%. In other words, while the UK increased spending less often quarter by quarter, increases in UK public spending were much, much larger – more than double those observed in the broader EU.

Brown / Blair’s increased government debt an average of 1.6% per quarter, while to date David Cameron has only increased it 0.76% per quarter. So given Moody’s comments and S&P’s continued vigilance,, we expect cuts in public spending to get deeper as 2012 progresses, with the attendant knock on effect in the broader economy.

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