Conservative research shows there’s no debt crisis

David Cameron mentioned the phrase "debt crisis" eight times in his speech yesterday. On Sunday, speaking on the Andrew Marr show, George Osborne said, "the difference between Britain and countries like France and Germany is that we have an absolutely enormous budget deficit." But research used by the Conservative Party show that Britain's debt position is far from in crisis despite their claims.

David Cameron mentioned the phrase “debt crisis” eight times in his speech yesterday. On Sunday, speaking on the Andrew Marr show, George Osborne said, “the difference between Britain and countries like France and Germany is that we have an absolutely enormous budget deficit.”

The two may seem logically consistent but they are not. There is no doubt but Britain has the largest fiscal deficit in the G7. This is the result of the fiscal stimulus announced in the Pre-Budget Report last year, the automatic stabilisers such as unemployment benefits, and a structural deficit which both parties now recognise must be addressed. But Britain’s debt position is far from in crisis despite Conservative claims.

In their policy white paper on sound banking, the Conservatives produce a graph (page 9) showing that government debt will increase in the UK from 2007-10 by 42 per cent of GDP, the highest in the G7. There is debate about which figures are most accurate, but using the same OECD source (Annex Table 32), Left Foot Forward is able to produce a graph that shows total debt/GDP ratios for the G7.

The graph shows that Britain was better placed than any other G7 country going into the downturn and in a good position to absorb a 42 per cent rise. Indeed, although the UK’s stock of debt will have surpassed Canada and Germany by 2010, at 89.3 per cent it will still be below the OECD average of 100.2 per cent.

The money markets, of course, know all this. On Newsnight last night, Philip Hammond said, “We need to send a clear message to the markets. Two of the ratings agencies have already warned us that the Britain’s AAA rating will be at risk if the next Government does not show greater determination than this Government has so far demonstrated.” (14’57”) This contrasts with the report in today’s Financial Times that, “A growing political consensus on the need to cut public spending as the economy recovers is set to preserve Britain’s top-notch triple-A credit rating.” According to Pierre Cailleteau, head of sovereign risk at Moody’s, a downgrade was “very unlikely.”

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