How close is the UK to the edge? (updated)

by | Dec 2, 2011

In his autumn statement, George Osborne warned that, without his programme of fiscal consolidation, “Britain would have borrowed an additional hundred billion pounds in total [by 2014/15]. If we had pursued that path, we would now be in the centre of the sovereign debt storm.”

But how confident can we be that that storm has been averted? In the city, sovereign risk and an economic downturn are seen as the most important threats to the UK financial system. An economic downturn now seems more than likely, and will be savage if efforts fail to shore up the euro.

What about a sovereign debt crisis in the UK? When asked to name the most important current threat, risk managers for around 70 UK financial institutions now put debt at the top of their list.

I think they’re right to be worried. Even after this week’s downward revisions, the Office of Budget Responsibility expects tax revenues to grow rapidly over the next two financial years – but there’s little prospect of that happening if there’s a sharp downturn.

Imagine, instead, if the government’s income declined in the same way it did after 2008 – that would mean more than £150bn less revenue than expected over two years (a ‘taxation double dip’). Following the Chancellor’s logic, that would be enough to steer the UK straight into a debt storm.

Now you could argue that revenue will prove more robust than it did after 2008 and that’s probably true if the UK sees ‘normal’ economic underperformance. But euro breakup – accompanied by an inevitable banking crisis, massive disruption of exports, lower oil revenues etc. – would take us far beyond normal.

Bottom line: if the euro goes, it probably takes the British government with it. Happy days.

Update: Duncan Weldon has an IMF chart that shows the disproportionate contribution loss of tax revenues has made to driving up UK debt over the past four years.


  • David Steven is a senior fellow at the UN Foundation and at New York University, where he founded the Global Partnership to End Violence against Children and the Pathfinders for Peaceful, Just and Inclusive Societies, a multi-stakeholder partnership to deliver the SDG targets for preventing all forms of violence, strengthening governance, and promoting justice and inclusion. He was lead author for the ministerial Task Force on Justice for All and senior external adviser for the UN-World Bank flagship study on prevention, Pathways for Peace. He is a former senior fellow at the Brookings Institution and co-author of The Risk Pivot: Great Powers, International Security, and the Energy Revolution (Brookings Institution Press, 2014). In 2001, he helped develop and launch the UK’s network of climate diplomats. David lives in and works from Pisa, Italy.

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