Folks – This is getting ugly
So says Paul Krugman today in a warning that Europe’s sudden switch to deficit fetishism is likely to depress the global economy.
Meanwhile Robert Peston makes an important point about the UK deficit. Not all deficits are created equal as governments borrow money in different ways and on different timescales.
Greece is in a difficult position not just because of the size of its deficit (not to mention structural problems such as endemic tax dodging) but because it has to repay large chunks of it loans in the next few years. Indeed it faces payments equal to 25 per cent of GDP in the next two years.
This is another big difference with the UK. As Pesto says:
… the UK faces comparatively modest debt repayments (as opposed to new borrowing) between 2011 and 2013: at the peak in 2012, it has to refinance bonds equivalent to 3.9% of GDP.
So the UK’s total financing requirement over the next few years should not exceed 15% of GDP. It was considerably higher last year, in fact.
Which is not to say that the UK’s public sector deficit, equivalent to 11% of GDP, is a trivial problem. But the government has perhaps a bit longer than would otherwise be the case to reduce that deficit because it has relatively less existing debt to refinance than some other countries.
Or to put it another way, because the UK’s peak financing requirements is less than that faced by other countries, the UK is perhaps less at the mercy of markets than some may fear.
In other words there is no need to rush into deficit reduction that threatens to derail the fragile recovery. In Paul Krugman’s words: say no to “fiscal austerity mania”