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Project Armageddon on The UK Economy – Thinking the Unthinkable

Tullett Prebon have released the final part of their Project Armageddon series on the state of the UK economy (see the previous excellent part No Way Out) and having started wading through, I am very impressed with the breadth and depth of their research.

I would go so far as to say that anyone with the slightest interest in the UK should take the time to go and read the report in full – it is available here at ZeroHedge.

As a taster, a couple of parts which caught my eye early on …

Firstly on Labours term in office :

Labour’s period in office was characterised not just by economic and fiscal mismanagement but also by the promotion of a culture of moral absolutism centred around spurious and selective concepts of ‘fairness’. This culture, and the accompanying sense of individual and collective entitlement, is the biggest obstacle in the way of effective economic reform

Secondly on the coalitions debt reduction plans :

Recognising the imperative need to reduce the deficit, the government has set out a plan whereby modest real-terms spending cuts, and a big increase in revenues, will reduce the deficit from11.1% of GDP in 2009-10 to 1.6% by 2015-16. The snag with this otherwise admirable plan is that it depends upon some pretty heroic economic assumptions, most notably the delivery of growth of 2.9% by 2012-13. At 2010-11 values, and after allowing for an expected £25bn increase in debt interest, the government plan requires that the gap between revenue and expenditures be narrowed by £159bn. Increases in tax rates will contribute £31bn, and spending cuts a possible £44bn (so long as unemployment falls as the government expects), but the bulk of the deficit reduction is expected to result from a growth-created £84bn increase in tax revenues.

If growth were to come in at half of the official target, interest costs and other spending would rise, tax revenues would fall very far short of expectations, and the plan would unravel.

On current trends (and with everybody being squeezed to buggery with inflation and low or no wage growth) coming in at half the target growth rate seems ambitious.

And finally, a chunk from the report summary which gives a very good overview of why we are in this position and how we could very well be stuck here for some time :

Both the government and its opponents seem to believe that the delivery of recovery requires nothing more than the selection of the right blend of macroeconomic policies.This report seeks to demonstrate that no such magic formula exists.The Coalition’s deficit reduction plan,though laudable in its intent, is set to fail because it is predicated upon levels of growth which cannot be delivered by the economy as currently configured. The opposition’s calls fora ‘plan b’ based on a more gradual approach to deficit reduction amount to nothing more than a recipe for more denial and an accelerated lurch into crisis.

The reality is that the cupboard is bare where macroeconomic policy is concerned. Massive stimulus, totalling £590bn and equivalent to 40% of GDP,has been tried, and has failed to deliver any growth at all. Interest rates arealready at rock-bottom. Fiscal stimulus looks impossible with Britain boxed into a high-debt, low-growth trap. If an escape route does exist at this very late stage, it lies not inmacroeconomic strategy but in supply-side reform.

Businesses in the UK are crippled by government interference and by the excessive demands of the state machine.The only way to deliver growth would be to unshackle enterprise and transfer resources tothe private sector, a process which would require reductions in public spending which go much further than anything thus far contemplated bythe government. Logical though this is, we fear that such reforms could be blocked by vested interests and by the ‘must-have’ entitlement culture built upon a foundation of spurious moral absolutism.

Is there a sufficient sense of realism left in the body politic? If there is, a return to viability might be possible even at this late stage. But if, as we strongly suspect, there is not, then this may be the end of the road, and there really may be no wayout for Britain.

Well worth reading in full.

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