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Britain's Historic General Election

Author: Martin Wolf, Distinguished Visiting Fellow for International Economics
April 29, 2010
Financial Times

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At the time of the UK's most significant general election for a generation, I am living in New York. That has disadvantages and advantages: the disadvantage is distance from the campaign; the advantage is the ability to stand back. When I do so, I find myself struck by the existential choices confronting the UK: will it become a big Greece or a big Netherlands?

The UK has a huge fiscal deficit, a bloated state and soaring public debt. It is far poorer than expected three years ago. Adjustments must be made. The question is whether the country drives those adjustments or is driven by them. Yet both politicians and the public are denying the choices. As the FT's on-line simulator shows, even the £37bn ($57bn) in cuts to be delivered in the next spending review would hurt a great deal. Yet, note my colleagues, ďall three main parties refuse to explain how at least £30bn of these savings will be foundĒ. The Institute for Fiscal Studies has spelled out how incomplete, foolish and incredible are the longer-term plans for cuts in spending. The IFS has also released a devastating report on the quality of planned tax changes. For idealists who believe that democracy is about informed debate, this election has to be brutally disillusioning.

Yet the challenges are huge. The UK's share of public spending in gross domestic product is higher than in Greece, Italy, Portugal and Spain. As the Centre for Economics and Business Research has noted, many regions of the UK are now little more than government dependencies. The International Monetary Fund forecasts the fiscal deficit this year at 11.4 per cent of GDP, which is higher than the 8.7 per cent of Greece and Portugal and Spain's 10.4 per cent. The Organisation for Economic Co-operation and Development forecast UK net public debt at 70 per cent of GDP at the end of 2011, below Greece's 101 per cent, but close to Portugal's 69 per cent and far above Spain's 49 per cent.

Fortunately, the UK has three huge assets vis-a-vis these countries: credibility won over a long history of managing its public finances, frequently with far higher public indebtedness; second, a flexible exchange rate (thank you, Gordon); and, third, a current account deficit forecast by the IMF at only 1.7 per cent of GDP this year, against 5.3 per cent for Spain, 8.9 per cent for Greece and 9.0 per cent for Portugal. The country is largely self-financing. The UK's private sector is running a surplus of income over spending of 10 per cent of GDP.

It is obvious, however, that the UK government is going to have to make harsh choices. So why do I feel the Netherlands is a relevant example for the UK? It is not just that my mother was Dutch. The Netherlands was the UK's forerunner as a commercial, naval and imperial power. The country has been in decline, relative to other powers, for three centuries, against just one and a half for the UK. But it has also been a success, economically and politically. It is Atlanticist, stable and democratic, despite its complex coalition politics. It has a sound economy, successful companies and a robust external position. After two centuries of relative decline, vis-a-vis the UK, it has been richer for most of the past half century.

The reason the Dutch example is relevant Ė and even attractive Ė is partly that the UK seems to be moving towards coalition politics. It is also because the UK's pretensions to great power status will become ever more absurd as the populous emerging countries rise. The public spending reviews now in prospect are sure to accelerate the pace of geopolitical decline. The UK simply has to adjust its reach to its grasp.

As I have indicated in several recent columns, the outline of what needs to be done is clear. As Bill Martin of Cambridge University's Centre for Business Research points out in an excellent new report, the economy must rebalance towards net exports and investment; policy must strongly support economic growth; and there must be a credible plan for eliminating the fiscal deficit, weighted towards cutting bloated spending. Given the scale of the deficit, reductions in social security and public sector pay bills are inevitable. In the absence of such a plan, the country may face a stark choice between higher inflation and renewed recession or, worse, no chance of avoiding both, together.

The test of a country's political maturity lies in its ability to define and make realistic collective choices. Unfortunately, the UK has been making a pretty poor job of this in recent years, though just how poor was not evident to most of us until the crisis. But this crisis is the test.

Whatever the outcome of the election, the government that emerges will have to take up the big challenge. If it fails to do so, perhaps because it is too weak or has its eye on another election, markets may take matters into their own hands. The UK has a good chance of avoiding being Greece or Spain. But it cannot take success for granted. It must control events, rather than be controlled by them. We will soon know whether its politicians have the courage and maturity to act. I hope, but I am not, alas, optimistic.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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