From the TUC

The IMF on what caused the UK’s debt

07 Oct 2011, by Guest in Economics

Earlier this week the IMF released its Regional Economic Outlook for Europe.

The press picked up on the fact that it was reiterating its call for some countries (including specifically the UK and Germany) to slow the pace of cuts if growth falters.

They made the same call in the most recent World Economic Outlook and Director Christine Lagarde urged policy makers not to ‘slam on the fiscal brakes’ in an FT article back in July.

Given that this isn’t a new call I thought the chart below was perhaps the most interesting bit of analysis in the report. And something I’ll be returning to in a future blog.

It shows what has driven the increase in public debt between 2007 and 2011 in four selected European countries.

The red segment is fiscal stimulus – what becomes clear is that the UK’s fiscal stimulus (the VAT cut and the bringing forward of investment) was relatively small – especially when compared to ‘austere’ Germany’s much larger direct stimulus.

The yellow segment is support for the financial system – the direct costs of bailing out banks. It’s interesting again to note that Britain’s costs here – although higher than those of France or Italy – are well below German levels.

The grey segment is the ‘interest-growth dynamics’ – the effect of higher interest payments (due to either a bigger stock of debt or higher rates) adjusted for growth. Here we see that the UK and Germany are doing relatively well but Italy is really suffering – it’s these dynamics that are a major driver of market fears about Italy’s debts.

Finally the blue segment is ‘accommodated revenue loss’ –as the IMF explains are ‘revenue losses associated with output losses from the financial crisis’ – which was clearly the driver of the UK’s increase in public debt.

So there we have it – according to the IMF the reason the UK has experienced a large build up in public debt is because of the costs of the large loss of output following the crisis. Not quite the story of public sector profligacy the government is usually so keen to tell.

18 Responses to The IMF on what caused the UK’s debt

  1. Rick
    Oct 10th 2011, 12:55 pm

    Why is Germany’s blue segment negative. Are they saying that German tax revenues actually increased between 2007 and 2011 and helped to lower the increase in debt?

    If they did, that’s astonishing, or am I missing something?

  2. Duncan Weldon

    Duncan Weldon
    Oct 10th 2011, 3:12 pm

    Mainly as the German economy has recovered much quicker than the others.

  3. jonathan
    Oct 11th 2011, 2:54 am

    Question, applicable to the UK and the US, why then do we so support the financial sector? The UK worries tremendously about the role of London in world financial trading. Let’s assume there’s a net gain to the UK from this. I assume it because I have no data to guesstimate the net. There is obviously a large cost associated with this role as well. That cost is socialized, meaning mostly that it is shifted down the income scale.

    I note that in the US it’s less clear the net is positive, given the vast hole dug by the financial industry in repeated failures. But I thought of this in a specific context: Slate magazine tried to ask billionaires if they would want their taxes raised. Only a few responded. A typical response was they wanted to see the tax money targeted and not wasted. Sounds ok, but that suggests to me the cost of a loss should also be targeted and yet it has been socialized and pushed down the income scale.

  4. Luis Enrique
    Oct 13th 2011, 1:38 pm

    this is gross debt, right? so if there are assets arising from “financial sector support” – i.e. bank equity – that’s not in the picture.

    would be interested in a breakdown of where revenue losses came from.

  5. Sceptic
    Nov 23rd 2011, 12:50 pm

    But what your article and the IMF fail to cover is the massive overspend and deficit run up by the Labour government BEFORE the 2007 crash – the 2001-2007 splurge where Prudence (remember her) was chucked out the window, significantly increasing the deficit in the good years and leaving the UK seriously overstretched when the bad times arrived. The problem was run up before 2007.

  6. RichardT
    Nov 25th 2011, 2:34 pm

    ” Not quite the story of public sector profligacy the government is usually so keen to tell”

    Come off it. Brown was in deficit at the height of the bubble, with revenues from financial services, property and construction burying the Treasury. Then the bubble popped, as they do, and the tax take fell off a cliff, as it does, resulting in the large blue bar on your neat little chart.

    Pretty much exactly the story the government tells, iow.

  7. nonny mouse
    Nov 29th 2011, 1:10 pm

    ” Not quite the story of public sector profligacy the government is usually so keen to tell”

    When an ordinary person has a cut in income then they either cut their spending or borrow on the credit card to make up for the difference.

    The prudent person takes the loss in standard of living to match income. The reckless person borrows more to make up for lost income.

    The reckless person cannot keep on using the credit card forever. Eventually he has to stop spending and can actually spend less because he has a credit card bill every month.

    If the reckless person borrows and buy a shiny new TV to make them feel better then they end up with a lot more debt and higher credit card interest bills so the time when they need to cut back comes sooner.

    Over time the prudent person can do more with his lower wages than the reckless person because the reckless person has to pay the credit card bills.

    The prudent person can afford to invest in training and a new suit to get a better job. The reckless person has to make do with mending his old suit.

    The prudent person gets the new job when it becomes available. The old person looks scruffy and loses the job he has.

    We were told that Gordon Brown was prudent. It was a lie. He was a scruffy reckless fool who deserves to be out of a job.

  8. Carol Wright
    Nov 29th 2011, 1:38 pm

    “…The old person looks scruffy and loses the job he has.
    Unless you’re a banker, in which case you get a nice fat bonus,
    shuffled politely to another bank and continue ‘merrily’ on your way. And, that’s what ‘scruffy’ prime ministers should
    be dealing with!!!

  9. synthjock
    Nov 29th 2011, 1:58 pm

    How different would that graph have looked if Vodafone had paid its tax bill in full?

  10. Alex
    Nov 30th 2011, 6:29 am

    Actually, nonny, “prudent” people who suffer a cut in their wages normally look for a second job.

    Regardless, your response fails to acknowledge the paradox of thrift. How does cutting spending and increasing taxes (which depresses the economy) help? The economic crisis has made us poorer so you want the government to respond by making us poorer still?

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  13. George J. Georganas
    Dec 5th 2011, 9:31 am

    In fact there is no stimulus. There is another graph in the IMF Regional Outlook : Europe report immediately to the right of the one published here that shows Germany did no stimulus in net terms. But one can easily see it in the published graph, too. The “accommodated revenue loss” is a gain for Germany, so it nets out with the fiscal stimulus.

    One can check all this on page labeled 3 (but page 21 of the .pdf file) of the report here : http://www.imf.org/external/pubs/ft/reo/2011/eur/eng/pdf/ereo1011.pdf/SB10001424052970204449804577068380487319736.html

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