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.
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.