Saturday, January 15, 2011

UK Government Debt: will the debt-to-GDP ratio hit 95 percent by 2012?

Should we worry about that 95 percent debt-to-GDP ratio? It is, after all, only a forecast by a group of frenchified economists working for the OECD in Paris. Anything can happen between now and 2012.

The financial crisis taught us some stunning lessons about the value of forecasts. It reminded us of our intrinsic vulnerability and that the future can be full of surprises. Moreover, some of those future shocks can be beyond our limited imagination.

Who in 2006 could have imagined where the UK economy would be four years later. The UK economy was chugging along nicely, growing at three percent a year, with inflation rate of 2 percent and the fiscal deficit of 3 percent. Government debt had stabilised at 40 percent. Overall, these were fairly relaxed numbers. There was nothing to suggest that the UK was about to fall into the dark pit.

Then suddenly in the summer of 2007 Northern Rock collapsed, and things simply ran out of control. Tax revenues declined, the government's deficit exploded, and the economy stopped growing.

One by one UK banks came under pressure, and before you could say Lloyds bank, half the UK financial sector was in government ownership. Who could have foreseen such a thing? Not me, that is for sure.

(the data for this chart is from the OECD)

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