Is a UK debt crisis on the horizon now that the country has voted to leave the EU?
The fortunes of the UK economy and that of Europe have charged in opposite directions ever since the UK voted to leave the European Union last year. Even though it’s taken 12 months for the slowdown to appear in the data, the impact of the leave vote is now weighing heavily on the UK economy with first-quarter GDP growth of 0.2% lagging every other nation in the rest of the 28 nation bloc. Over the past few days, more lackluster economic data has been published. Data from the Office for National Statistics showed that economic productivity per hour fell by 0.5% in the first quarter compared with the fourth quarter of 2016, taking productivity back below its previous peak reached in 2007. Meanwhile, the purchasing managers’ index, compiled by IHS Markit, fell to 53.4 in June, down from 53.8 in May. Around the same time this data was released, the HIS Markit Eurozone Composite PMI data was released showing Eurozone economic growth at a six-year high during the second quarter, giving an estimated quarter-on-quarter GDP growth rate of around 6%.
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With economic growth slowing as Brexit bites, it’s becoming clear that the UK’s newly elected government is going to have to make some tough choices in the months ahead. But after an election which showed that the population is tired of cost-cutting austerity measures, politicians have a fine line to tread. High profile easing of some austerity measures looks likely in the Autumn budget, although these populist measures will do little to restore confidence in the country’s fiscal and economic recovery.
Could A UK Debt Crisis Unfold in coming decades/.
Bank of America Merrill Lynch’s analysts Robert Wood and Sebastien Cross believe that the most likely course the government will take is to ease the cap on public sector pay rises. The cap, which has been in place for a number of years, caps the annual pay rise for public sector workers at 1% per year. According to the Institute of Fiscal Studies, allowing public pay to rise with private sector wages could cost the country and additional £9 billion a year by 2020, a large expense that would derail plans to balance the budget by 2025.
However, as Bank of America’s analysts go on to point out, these plans to balance the budget do not account for, among other things, the aging population and rising tax thresholds. Like every other developed nation, the UK is facing an increasing social security bill from changing demographics. The impact of these changes has only become more pronounced in recent months thanks to the triple lock on state pensions, which guarantees an annual increase in pensions by a minimum of 2.5%, the rate of inflation, or average earnings growth – whichever is highest.
Poar Brexit inflation has spiked to nearly 3% piling pressure on workers, who have seen no similar increases in wages but putting more money in the pocket of pensioners. According to Bank of America’s analysts, without action on this front, the UK’s primary budget balanced could explode to more than 6% of GDP by 2066/67 from 0.7% of GDP in fiscal year 2021/22. Another colossal issue facing the country is that of migration. Current government forecasts do not factor in a significant fall in migration, which many voters voted for in the referendum. The forecasts currently project that migration will fall to 185,000 a year by 2021. It has already fallen to 248,000 for 2016 from 332,000 for 2015, and a further serious decline looks likely. These declines the government admits could have a severe impact on deficit projections and could lead to a full blown UK Debt Crisis.
All in all, assuming there is no change in government policy going forward official government forecast suggests debt/GDP could hit 150% by the middle of the century and 225% by 2065. Such dismal forecasts do not leave much room for extra spending, and if the government decides to buy votes by peeling back unpopular austerity measures, there could be a UK debt crisis and the country could become the next Greece before the end of this century.