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Britain confronts debt of Greek proportions

The woes of Britain show that the troubles for Europe, and the West, extend far beyond the traditionally laggard countries of southern Europe.
/ Source: The Associated Press

Government debt is growing, as is the deficit. The economy is struggling to get out of recession and there is talk of spending cuts or higher taxes. The unions are on edge. And the currency is plummeting.

The country is not Greece — but Britain, almost six times bigger, racking up debt even faster, and headed into a critical election.

The woes of Britain — only recently a cocky symbol of the global boom times — show that the troubles for Europe, and the West, extend far beyond the traditionally laggard countries of southern Europe.

Britain does have some factors in its favor: unlike Greece and its reliance on the common euro currency, it prints the currency in which its liabilities are denominated. It is also considered a surer bet for repayment, maintaining a triple-A credit rating.

But the approaching general election is complicating matters. Electoral campaigning is always a difficult time to extol the virtues of cutting spending on services such as roads and hospitals and raising taxes to tame an unruly deficit — and the recent recession isn't making cash-strapped Britons more amenable.

Even worse, the growing fear is that neither Prime Minister Gordon Brown's ruling Labour government nor the main opposition Conservative Party will win enough seats in the poll, likely to be on May 6, to form a majority government.

A parliament in which no party has majority of seats could be disastrous for the country's fiscal problems, with the government lacking the votes to push through austerity measures.

And debt is piling up at an alarming rate.

Huge deficit
The British government borrowed $6.44 billion in January alone — a staggering $145,656 every minute — ending 17 years of surpluses for the month and putting it on track for a record $266.7 billion budget deficit this year.

Economists warn Britain is on course to borrow the equivalent of 12.8 percent of gross domestic product in 2009/10 — exceeding the 12.7 percent forecast in crisis-hit Greece and far above the average 6 percent for Europe.

Britan's debt to GDP ratio is forecast to reach 82 percent this year, almost double the level two years ago — albeit well shy of the 123 percent in Greece.

The huge deficit is partly due to big expenditure by the government to mitigate the impact of the global credit crisis and economic downturn. It has taken over two troubled mortgage lenders, and holds major stakes in two big banks, Royal Bank of Scotland and Lloyds Banking Group. The Bank of England has poured 200 billion pounds into inflating the money supply, and 400 million pounds has been spent on an incentive program for new-car buyers.

So far, Britain has escaped too much scrutiny because of its differences from Greece, notably the healthy sovereign credit rating and the fact that much of its debt is long term. That gold standard credit rating allows Britain to borrow relatively cheaply on global financial markets.

But yields on government bonds have in recent weeks soared to among the highest in Europe while the British pound has taken a battering — both signs of increasing worries about the country's public finances.

Deteriorating profile
There are also concerns that Britain, like other advanced economies, entered the global crisis with its finances in a worse position than many developing nations that spent the last decade cleaning up their balance sheets.

"The U.K.'s deficit, though worryingly large, is still manageable, but the government must act now to set out a convincing, credible pathway for balancing the books," said Richard Lambert, the Director-General of the Confederation of British Industry, the country's leading business lobby group.

Brian Coulton, Fitch Rating's head of Europe, Middle East and Africa sovereign ratings warned that Britain's credit profile has deteriorated in recent months and that the government's plans fall far short of what is needed.

Coulton said that he was "uncomfortable" with the country's current fiscal plans and wants to see "more credible" plans over this year.

That has been made all but impossible by the coming general election.

'Preserve and expand'
The two major political parties have taken opposing sides on what many see as a Catch-22 for the country economic fortunes.

Brown's Labour Party maintains that cutting the stimulus now, via less spending and higher taxes, would help cut the deficit, but could send the economy back into a dreaded double-dip recession. Plus, there's the chance that recession-weary Britons won't stand for any more economic pain — even in the name of eventual gain.

Commentators have been raising the specter of Britain's infamous "Winter of Discontent" in 1978-1979 when thousands of striking workers crippled essential services across the country — and led to the election of Conservative leader Margaret Thatcher.

Mass walkouts in Greece in recent days have at times shut down public services, closing schools, customs and tax offices, halting public transport and grounding flights, in response to austerity measures. Britain's unions have lost much of their clout since the 1970s and are less likely to take the battle to the streets — but will surely push their Labour allies hard to minimize cuts.

Brown promised to set out more detail on his debt-cutting plans in a pre-election budget set for March 24, offering a glimpse by announcing a pay freeze for senior public employees.

"We dare not risk the recovery," Brown said. "For our task above all else is to preserve and expand the jobs — and lift the standards of life — of the British people. We are weathering the storm, now is no time to turn back."

The Conservatives, meanwhile, have sought to win over critics who argue that fiscal tightening won't endanger economic recovery if it is based on lower public spending, rather than higher taxation.

The party's Treasury spokesman George Osborne has pledged to announce a new budget within weeks if his party is elected, with spending cuts from the summer.

Until recently, that looked the most likely outcome for Britain with the Conservatives far ahead in election polls. But they have squandered that lead in recent months — the latest Ipsos-Mori poll for the Daily Telegraph newspaper, published Feb. 26, puts the Conservatives at 37 percent, just 5 percentage points ahead of Labour.

The lack of a political majority would bring with it anticipated delays to any fiscal austerity programs and a loss of trust for international investors.

That has resulted in a vicious circle for the already weakened British pound, with worries about a hung Parliament adding to the effects of the government's economic stimulus plans. Its currently trading around $1.49, down 7 percent from $1.61 at start of year.

As a contrast, the situation in the United States is not as dire even though debt isn't exactly low. The deficit hit 9.9 percent of GDP last year, but the difference is that holders of U.S. Treasuries aren't so worried because they trust the U.S. economy is strong enough to generate revenue for the government. Investors also know that the U.S. government can quickly raise taxes, a longer process in a hung parliament.

Whatever the outcome of the likely May election in Britain, one thing is clear: the consequences of dealing with the mountains of debt will to be felt for a generation.