Harder-Edged Warnings About Britain’s Economy The New York Times Published: April 14, 2009 LONDON — In the dank gloom of the factory that he and his fellow workers had just occupied, John Horscroft recalled a time 30 years ago when strikes and industrial unrest in Britain were an everyday occurrence. “It feels like those days again,” said Mr. Horscroft, who with 226 colleagues was laid off when a car parts factory in North London was shut down last month after its American parent company, Visteon, put three British plants into bankruptcy protection. “We are all together now, fighting for a cause.” As job losses accumulate here, along with the government’s debt burden as it tries to fight the ravages of recession, Mr. Horscroft’s nostalgia has been joined by harder-edged warnings — from no less a critic than former Prime Minister Margaret Thatcher — that Britain’s deteriorating public finances might require the government to seek aid from the International Monetary Fund, just as it did back in 1976 when the country’s economy was on its knees. As remote as that possibility might be, it underscores the financial bind Britain is in and represents another humbling comedown for a country that once had ambitions to overtake New York City as the world’s financial capital. Speculation that Britain may once again seek monetary fund assistance — and become the first major western European country to do so in this financial crisis — rests upon a crucial, uncertain assumption: that the combination of its steep debt and wounded banking sector will put too much pressure on the already wobbly pound. The numbers are worrisome. Britain’s budget deficit is 11 percent of its gross domestic product, compared with 13 percent forecast for the United States this year. Analysts say that without severe spending cuts and tax increases, government debt will jump to 80 percent of the overall economy in the coming years, from today’s level of about 40 percent, a ratio that approaches that of troubled economies like Greece and Italy. So far, investors have been willing to finance Britain’s debt at relatively low interest rates, unlike in countries like Hungary and Latvia, whose reserves have been drained, leading them to turn to the I.M.F. for support. Last month a failed British government bond auction in London sparked some fear, but subsequent debt sales have been successful. That could change, according to Simon Johnson, the former chief economist of the I.M.F., if those now holding British assets lose confidence in the government’s ability to pay its debts and start abandoning the pound in droves, as they did in 1976. In contrast to some of its troubled European partners like Ireland, Spain and Greece, Britain did not adopt the euro and is thus more vulnerable to a run on its currency. If the situation worsens, turning to the monetary fund may be the best alternative, Mr. Johnson said. “If you have a budget problem and a banking problem, the bottom line is that you need to make adjustments,” he said. “And an I..M.F. loan can make Britain’s life easier, not harder. They may have to do it.” Mr. Johnson’s views are decidedly in the minority here, and even he considers the likelihood that Britain will face such a situation to be remote. Still, he and the financier George Soros, who made $1 billion betting against the pound in 1992 and who has also cautioned about the possibility of a monetary fund bailout, have attracted considerable attention. Their views signal a growing fear that Britain, like some other countries that spent and borrowed from abroad with abandon, may be hit with a bill that it would have trouble handling. Ireland has a deficit of 10 percent of G.D.P. and a banking system that is in worse shape. Greece has the largest current account deficit in Europe at 12 percent of G.D.P. But Britain is the only one with its own currency to defend. The British scoff at the idea that they may need help from the I.M.F. At the Group of 20 summit meeting two weeks ago, Prime Minister Gordon Brown said his Labor government had no plans to seek such assistance. The 1976 agreement with the monetary fund was not only seen as a national embarrassment, it remained a symbol of a country that, under various Labor governments, effectively lost control of the economy to militant trade unions, resulting in spiraling debt and rampant work stoppages that brought down Britain. So it is no wonder that Mr. Brown would reject any comparison to Britain in 1976. Kathleen Burk, a historian at University College London, one of the authors of an account of the crisis in “Goodbye, Great Britain,” argued that the economic situation today might well be dire but it bore little similarity to the Britain of that period when, as she recalled, even the gravediggers were on strike. And while Mr. Horscroft and his fellow Visteon workers may look wistfully to the days of nationwide worker revolts, the numbers tell a different story.. In January, the British economy lost seven days to work stoppages compared with a combined 2,966 lost employee-days in the same month 30 years ago, according to the Office for National Statistics. Still, Britain’s situation is likely to get worse before it gets better. “It is not that debt of 80 percent of G.D.P. is unsustainable,” said Gemma Tetlow, an economist at the Institute for Fiscal Studies, a nonpartisan research group based in London. “It is that without fiscal adjustments, the debt could grow indefinitely to 100 percent and beyond. And the evidence suggests that the higher your debt,” she added, “the more your borrowing costs increase.” As the lesson of Britain’s crisis in 1976 demonstrates, good intentions are not enough to offset a loss of international investor confidence. Before the 1976 agreement, the Labor government of Prime Minister James Callaghan had already taken difficult steps to curb public wages and bring down the deficit, which at 5 percent of G.D.P. was about half of what Britain’s current gap is. But for foreign investors fed up with years of government excess, that was not enough and they unloaded their sterling holdings, starting the run on the currency that would drive Labor into the arms of the monetary fund. At the time, Mr. Callaghan delivered an assessment of Britain’s finances that resonates today. ”We have been living on borrowed time,” he said. “We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that that option no longer exists.” Later this month, Mr. Brown’s government is expected to present an especially austere budget to avoid turning to the I.M.F. like Mr. Callaghan did. “This would destroy the Labor Party,” said Ms. Burk, the historian. “It is one thing if you are Hungary or Zambia. But the idea that the United Kingdom is so weak that it cannot support itself without going to the I.M.F. would be system-shaking.” http://www.nytimes.com/2009/04/15/business/economy/15pound.html
