For the last ten years of the Labour government, the UK’s debt burden was lower than that of the US government. Even in the face of the collapse of the global banking system, the Labour government managed to keep UK debt levels below that of the US.
Now, the coalition’s contractionary policies mean that that record will hold no longer: the UK is about to have a higher debt than the recently downgraded US.
The Congressional Budget Office (CBO) – the equivalent of our Office of Budget Responsibility (OBR) – last night published its forecast that the US deficit would fall by a massive two per cent of GDP to seven per cent of GDP this year. Here in the UK we’re hoping that the OBR is right that the stagnating UK’s deficit shrink by a fraction of that, 0.8 per cent, if at all.
But even worse for the coalition, given that the US’s recent credit rating cut, the CBO is predicting that the US’s borrowing will start falling rapidly through the next few years as the US economy continues to grow.
The contrast of the last quarter’s growth could not be more stark: the US raced ahead, growing at an annual rate of 2.8 per cent; the UK is back in recession, shrinking at an annual rate of two per cent.
With this growth, the CBO now predicts that the US debt burden will peak in 2013 and start falling. The UK’s stagnation means that the US’s debt burden will fall below ours (see graph).
As we’ve been saying, this is all policy driven, and once again this emphasises our point.
Unlike Obama’s insistence to continue the stimulus, the coalition promised in June 2010 that even though they were about to savagely cut spending and undermine demand, debt would peak in 2014. That peak has been postponed a year to 2015 in the most recent OBR forecast.
As the peak in UK debt disappears into the future and the peak in US debt is brought nearer by its accelerating growth, one wonders what S&P will do.
• Introducing George’s Marvellous Deficit Calculator – Daniel Elton, January 20th 2012
• Osborne set to borrow billions more than Darling was projected to – Daniel Elton, November 16th 2011
• Cameron’s central argument on debt is wrong; Labour needs to find a way to say so – Asher Dresner, October 6th 2011
• Crisis caused by Cable’s “right-wing US nutters” is welcomed by Tory backbenches – Daniel Elton, July 25th 2011
• Obama’s deficit reduction plan is three times slower than Osborne’s – Will Straw, April 14th 2011