This morning the deputy prime minister Nick Clegg repeated the now discredited claim that when the coalition formed Britain was "on the edge of bankruptcy".
On the Today programme this morning deputy prime minister Nick Clegg repeated the now discredited claim that when the coalition formed Britain was “on the edge of bankruptcy”. The argument dates from a December 2008 Telegraph article by David Cameron and is an important component of the government’s “there is no alternative” defence of its policy of spending cuts.
Despite Mr Clegg’s claims UK bond yields – the best measure of how the market perceives the risk of default – were near record lows in May.
In fact the yield on UK government ten-year bonds was only 3.84 per cent on the day on the general election. It closed on Friday at 3.62 per cent. This does not look like the bond yield of a country that was “on the edge of bankruptcy”.
Greek bond yields soared to over 12% in May, whilst Irish yields hit over 9%. There is simply no comparison. If a yield of 3.84% implies the “brink of bankruptcy” then it is hard to see how George Osborne is so confident that the UK bilateral loan to Ireland, with a yield more than twice as high, will ever be repaid.
Former Treasury Permanent Secretary Andrew Turnbull has already made clear what he thinks of the “brink of bankruptcy” claim, as politics.co.uk reports:
“Well I always thought that we were capable of producing a financial settlement that wouldn’t take us into Irish and Greek problems,” Lord Turnbull told the committee.
“A very large part of our debt was domestically held. If people are going to sell gilts they’ve got to buy something else. Who are these great shining examples of people who are issuing rock solid debt you want to buy?”
When pressed on whether he thought the UK was on the brink of bankruptcy, the peer replied: “No, I don’t.”
BBC Economics Editor Stephanie Flanders has written that:
Whatever you think about the fiscal mess that the coalition inherited, these are not the characteristics of a country on the “brink” of bankruptcy or default.
It’s time that Nick Clegg stopped repeating old Tory attack lines.
Update 1615hrs
Listen to Nick Clegg’s lies:
70 Responses to “Clegg’s latest lie: UK was on verge of a “sovereign debt crisis””
Susan Thorne
RT @sparklebelieve: RT @leftfootfwd: Clegg's latest lie: UK was on verge of a "sovereign debt crisis" http://bit.ly/ePHOlC
Raphie
The UK’s Debt Crisis and the Tax Gap
Raphie de Santos
The bailout of Greece and Portugal in 2001 put strains on the whole Euro system. A single currency with competing national capitals and a diverse range of economies is unsustainable. Portugal is unlikely to survive beyond the first half of 2010 without a bailout. Spain is the big one that will break the Euro up.
The UK has no such EU protection being outside the Eurozone. It will depend on the International Monetary Fund (IMF) for such a bailout with much more draconian measures imposed on it. The UK is likely to face its own debt crisis at some point over the next five years. The UK’s current debt stands at 76% of the economy (GDP) or 180% of annual national income. By the end of the coalition’s term it will be 110% of GDP and 267% of national income. This is of course based on 2% growth in the economy per year for four years which is away above the estimates of all independent economic think tanks. Flat growth over the next four years – a more likely scenario given the effects of the cuts – would see a further £100 billion added to the debt total at the end of their term. The debt to GDP ratio would then be at 125% and the debt to national income ratio 307%
£305 billion of our existing debt has to be renewed or repaid over the next five years – 64% of our pre-credit crunch debt. Another£540bn -based on government estimates- has to be taken out over the same period to cover the annual deficits. We will pay £282.5 bn of interest over this period rising to £68.5bn per year or13% of national income. A large slice of our debt is linked to inflation – the higher inflation the more of the loan we must repay and the more annual interest we must pay – which has seen the deficit rise by £12 bn more than estimated over the last four months wiping out the “savings” from the June emergency budget cuts.
The UK government bond markets have started to reflect the widening deficit and the potential for public debt to be much higher than government forecasts. The yield on UK ten year government bonds have climbed by nearly 1% from August 2010 to the end of 2010 adding £23bn to the interest rate bill we will have to pay over the next five years.
Who will take up the high levels of debt over the next five years – at best £845bn of new loans will have to be taken out by the UK government over the next five years? Despite what some on the left say overseas investors hold a significant chunk of UK debt about 33% and the Bank of England (BOE) through its quantities easing programme holds about 20% of the debt. This leaves a much smaller reservoir of investors to absorb at least £845bn of debt over the next five years particularly if sterling were to weaken and UK government bonds became unattractive to overseas investors. At some point in the future the BOE will have to unwind it’s holdings by selling £200bn of UK government debt on the financial markets. This will depress UK government bond prices, pushing yields and the cost of borrowing up and saturating the supply of the UK government bonds making it more difficult for the UK government to issue fresh bonds.
Many on the left believe that the level of public debt is not an issue and we have had similar levels of debt before. But we have never built up these levels of debt in peacetime . The first time we accumulated these levels of debt was in the build and during the Napoleonic wars. Here the size of the GDP was much smaller in real terms to what it is now, so the size of the debt was much smaller relative to today’s debt. Britain too was the preeminent industrial capitalist power and was able to reduce the debt over a period of several decades of rapid expansion of the economy.
UK debt has risen dramatically at two times under modern capitalism – to fund the world wars and the rebuilding of the economy after the wars. The debt built up during the Second World War and in its aftermath was finally paid off 60 years later with most of it repaid by the 70s as the UK and world economy experienced a period of unparalleled expansion with no major recession for 30 years as capitalism was rebuilt from the ashes of world war two and the innovation of new technologies.
On the debt incurred during and in the lead up to the First World War, this was borrowed from the US banks. It declined in the early 1930s because we and other governments in Europe defaulted on it after the Wall Street crash and the onset of recession. This played a major part in freezing up world credit that led to the great depression. This situation is more familiar to today’s where defaults by major economies would likely lead to a complete freezing of the global financial system and a prolonged depression.
It is correct to call on debt defaults from smaller countries such as Greece, Ireland and Portugal which do not have the assets, resources and wealth to clear their debt and defaults by them would have a small impact on the international banking system. This is what Latin American countries did in the 1930s to the benefit of their economies.
It is also wrong to carry out a simple comparison of the UK’s debt to countries such as Germany who currently have similar debt to GDP ratios. Germany’s national income to GDP ratio is 75% while the UK’s is 40%. The UK economy is at 95% of pre-crash levels while Germany’s at 97.5%. Germany has a big manufacturing base while the UK relied on credit, banks and housing which are all bust. UK debt is set for a 110 to 125% range while Germany’s is levelling off. German debt has gone up by 12% in three years since the credit crunch while the UK has gone up by 100%.
The Tax Gap
A solution offered by some on the left is to clamp down on tax evasion and close down tax avoidance schemes. The Public Sector Services (PCS) union estimates through the work of an accountant Richard Murphy that up to £130 bn per year of the funding gap could be closed. On close scrutiny these numbers do not add up.
He for example estimates that £25bn of corporation tax could be recovered a year by closing tax avoidance scheme because UK companies are effectively paying a corporation tax rate of 22% instead of 28%. But only £32.5bn of corporate tax is paid by non-oil UK companies (about 6.2% of the UK’s national income). If he is correct then just under £9bn is lost through tax avoidance and not £25bn. Oil companies pay about £13bn in corporation tax which ties in with a 28% tax rate based on annual profits of £46bn per year. These profits match the number of barrels extracted per year, the average price received for a barrel of oil and the cost of extracting a barrel of oil.
He then estimates that up to £75bn of tax a year could be recovered from closing tax evasion and avoidance schemes of the rich. But the Sunday Times rich list estimates that the 1,000 richest people have £335bn in wealth. Most of this is held in illiquid or semi-illiquid assets such as shares and property. This wealth increased by £77bn in 2009 through a rise in the stock and property markets. On Richard’s numbers the rich would have no assets lefts after four and half years of taxing them with the assumption that the paper wealth of £335bn of paper assets could be realised into actual cash. We would to have an annual £75bn gap in funding after four an half years!
There are two major confusions with tax avoidance. One the UK has multinational corporations which avoid paying tax to overseas countries where they have generated their profits by booking the profits through jurisdictions with lower tax rates for example, Luxembourg. This is not tax that is due to the UK but to countries such as Germany and Spain and France and should not be counted as lost tax to the UK. Vodophone is recent example of this confusion. Two, much tax avoidance by UK individuals is carried out by low and medium waged workers paying money from their salaries into their pension schemes.
He then adds up to another £30bn a year lost through fraud and crime which is way above the £15bn estimated by the national audit office.
Left Social Democracy’s Arguments
There arguments can be summed as debt is not really an issue and any gaps in funding can be closed by closing down tax avoidance schemes and clamping down on tax evasion and fraud and crime. Rather than face up to the potential debt crisis the UK faces and preparing the working class for such a crisis, laying the blame for the debt at the capitalist system and the banks and putting forward a radical programme of wealth redistribution and social ownership and control of the major UK corporations to avert and IMF style rescue with all that entails.
We should point out where the debt has come from:
Doubled in last three years – $480bn to over a trillion
Previous doubling took ten years
Bailing out the Financial System
£175bn directly to banks and financial institutions
Stimulus Packages
£45bn – mortgage subsidies, tax for clunkers, cuts in VAT
Recession it induced -£145bn
Reduced income tax
Reduced corporation tax (banks accounted for 30% of corporation tax)
Increased welfare payments
Labour structural deficit to support weak economy
£135bn
We should also put forward a radical anti-capitalist alternative:
The Tories say there is no alternative to the cuts. Labour can only advocate slightly smaller cuts and tax rises implemented more slowly. The SNP can only offer a wage and council tax freeze and wait for fiscal autonomy.
We say there are an alternative all these parties’ policies that reduce the debt immediately, reducing the interest we are paying annually which is set to rise to £68bn annually by 2015 – 13% of annual government revenues:
– We would take the banks under full social ownership and control – they have £560 billion in liquid cash and £5 trillion of assets. This would not only allow us to recoup the £375 billion (£175bn indirect investment and £200bn through quantitative easing) that we have ploughed into them during the financial crisis and allow us to pay down a major part of our debt and fund socially useful projects. An example of this would be a renewable energy programme. The design, administration, construction, maintenance, running, assembly, commissioning and servicing of the programme would create hundreds of thousands of jobs and apprenticeships for our young and old.
– Rather than spend £4.5 billion on two socially useless aircraft carriers build new rolling stock for an integrated public transport system.
– We would introduce a progressive local income tax to replace the council tax; this would raise another £20bn across the UK and £1.5 bn in Scotland.
– We would reduce spending on defence by half and withdraw from the Afghanistan and Iraq saving up to £20 bn per year to spend on socially useful projects with no loss of jobs.
– Instead of raising indirect taxes or widening there scope we would raise taxes on corporations which have seen their tax rates halved under successive Conservative and Labour governments and a further 4% cut is planned in the budget. This could raise an additional £30 billion a year in revenues;
– Instead of the cuts in services we would close the loop holes in tax avoidance schemes – this would save £20 billion a year.
– We would tax the rich and wealthy. A one off 10% tax on Britain’s richest people would raise £35 billion. This would be used to provide millions of much needed houses through building conversion, building renovation and housing insulation and all the jobs that would be needed to achieve that.
– We would shift the burden of taxation from the poor and middle earners to the wealthiest 20% in society who earn 16 times more than the poorest 20% of society. Per head of the population the UK is the third richest country in the world but the second most unequal. This could generate up to an extra £30 billion a year.
– We would raise another £38bn a year for fifteen years by in taking North Sea Oil under full public ownership control
– Instead of cutting pensions and demanding people pay more towards their pensions we would look to provide an alternative retirement provision that is not dependent on the whims of the financial markets. We would provide for all people over 60 free rented housing, electricity and gas, public transport and free access to cultural and sports facilities.
An alternative world is not only possible but it is now necessary if we are to avoid paying for the crisis of their economic system and suffer years of austerity and slump.
This is a properly costed alternative based on data from the office of national statistics as is the data on the UK government’s debt.
Cllr Muhammed Butt
Sovereign debt lie from clegg http://bit.ly/hmF9tB
Wendy Maddox
RT @leftfootfwd: Clegg's latest lie: UK was on verge of a "sovereign debt crisis" http://bit.ly/ePHOlC
Chris Cook
A country that issues debt in its own currency cannot go bankrupt.
@ Ocean
Fractional Reserve Banking, and its close cousin Tax-payers’ Money are Austerian myths: for the reality
http://www.labourlist.org/taxpayers-money—myth-and-reality