Greek Calamity

Britain's debt set to be higher than that of Greece
By Edmund Conway and James Kirkup

Britain's public finances may end this year in a worse state than those of Greece, economists warned yesterday, raising serious fears over the economic stability of the country.

In surprise news which sent the pound sliding, official figures showed that the Government borrowed £4.3 billion last month.

It was the first time since 1993 that the public finances had gone into the red in January – a month in which tax revenues usually push the Exchequer into the black.

Economists said the scale of the shortfall in the budget could this year mount to over £180 billion – higher than even the Chancellor’s forecast of a record £178 billion.

Such an annual deficit would, at 12.8 per cent of British gross domestic product (GDP), be even greater than the 12.7 per cent deficit faced in Greece, which is nearing a full-scale fiscal crisis and may need to be bailed out by fellow euro nations or the International Monetary Fund.

The public borrowing figures coincided with bad news from the housing market, as the Council of Mortgage Lenders reported that mortgage lending dropped last month by 32 per cent, hitting the lowest monthly total in a decade.

The Bank of England also reported a decline in lending to businesses, indicating that the economic slowdown is far from over.

Jonathan Loynes, of Capital Economics, said: “With the budget deficit heading towards 13 per cent of GDP this year, and perhaps exceeding that of Greece, it is clear that a more credible plan to restore the public finances to health will be required shortly after the general election to keep the markets and rating agencies at bay.”

The poor economic figures will be a major blow to Alistair Darling, the Chancellor, as they come a month before the Budget, which he had hoped would provide proof that the economy was finally on the mend.

Gordon Brown also hopes to base Labour’s general election campaign on the party’s economic record and policies.

Tomorrow, he will unveil Labour’s election slogan of “Ensuring the recovery”, “Protecting front-line services”, “Standing up for the many” and “Protecting future jobs and new industries”.

Despite growing warnings from economists and business leaders that the size of the deficit poses a grave threat to Britain’s economic future, Labour says public spending should not be cut before 2011-12.

In a speech in London today, the Prime Minister will insist that the Conservatives’ plans to tackle the deficit by cutting spending this year would undermine the recovery.

“Instead of helping a recovery, their hatred of government action would risk the recovery,” Mr Brown will say. “Instead of defending ordinary families, they would kick the ladder of opportunity away from ordinary families.”

The Office for National Statistics said the Government had never before had to borrow cash in January, adding that the shortfall meant it had now borrowed £122 billion so far this financial year, equivalent to around £2,000 for every man, woman and child in the country.

The scale of the debt has been far greater than in previous recessions because this downturn has brought with it a collapse in tax revenues, particularly from the City, and a sudden increase in social benefits payments to the unemployed and disadvantaged.

A host of economists and businessmen have urged the Government to cut the deficit faster and deeper than it currently plans, with 20 leading academics suggesting last weekend that without action on the public finances, Britain could face a crippling fiscal crisis.

The Conservatives have warned that Britain could sacrifice its top credit rating unless the next Government takes drastic action.

Economists pointed out that although Britain could face a higher deficit than Greece this year, it benefits from having started the crisis with significantly healthier public finances.

Britain’s total national debt, built up over many years, has risen from below 40 per cent of GDP to 60 per cent, while Greece’s net debt is now close to 100 per cent of GDP. However, the worrying aspect for economists is the speed at which Britain is building up extra debt.

Philip Hammond, the shadow chief secretary to the Treasury, said: “These appalling figures — showing the first January deficit on record —illustrate the scale of Labour’s debt crisis.

“The Prime Minister must now heed the advice of leading economists and business leaders and set out a credible plan to get the deficit under control, starting this year, to put Britain back on her feet.

“The longer he delays, the more the recovery and our credit rating will be put at risk.”

In the wake of the statistics, Treasury officials spent much of yesterday morning calling round the City, urging major investors not to panic. However, the Government’s cost of borrowing, as signified by the interest rate it pays on its bonds, rose to 4.1 per cent — the highest level in 15 months.

A Treasury spokesman said: “These figures keep us on track to meet our pre-Budget report forecast ... the pre-Budget report predicted a sharp decline in self-assessed capital gains tax and income tax receipts paid this financial year, with January being the most important month for these receipts; that fall is evident in today’s figures.”

Owen James, of the Centre for Economics and Business Research, said: “In the wake of the continuing problems for Greece, international investors are wary of economies with large deficits.

“Despite the fragile nature of the recovery, Britain must avoid the predatory eyes currently focused on the likes of Portugal, Spain, Italy and Ireland. It is imperative that appropriate action to reduce public borrowing is taken by the next government; we are sceptical on whether the pre-election Budget will contain sufficient actions to appease market concerns.

“This data underlines the need to make clear commitments on future policy.”

James Knightley, an economist at ING Financial Markets, said: “Given the concerns about public deficits around Europe at the moment, this could put the UK back in the spotlight.”