Osborne’s last act as Chancellor?

The post title comes from a strategy note (links to pdf version) written by Dr Tim Morgan at Tullett Prebon which paints a rather different picture of our recent past and future prospects than you will hear from either politicians (of whatever colour) or the MSM.

The key finding of the research behind the paper is that total public and private borrowing has averaged 11.3% of GDP in every year since 2003 and that this borrowing alone produced the Brown bubble golden years of above trend growth and unfettered public and private spending.

The main thrust of the current governments recovery plans lie in holding government spending levels at their 2010 levels (yes, not actual pound notes cuts) whilst growth and increased tax receipts catch up to fill the hole currently serviced by £140 billion per year government borrowing.

The problem with this reliance on growth rather than real cuts in spending is that the past drivers of growth (finance, construction, real estate and free flowing public spending) are all dependent on continued borrowing which has collapsed across private sectors and is in rapid decline in the public sector.

As these drivers account for 58% of UK output and their debt funding has been drastically curtailed the conclusion is that the current government forecast of 2.8% growth from 2013 onwards will be more likely close to zero.

With zero growth and no upturn in tax revenues the planned deficit reduction is unlikely to happen and will leave the UK with borrowing requirements in the £100 billion plus range for year after year until either public spending is actually cut properly or the UK as a whole goes bust.

I really suggest that you go and read the whole paper as it is one of the most informative articles I have seen on the credit boom since 2002 and the likely future prospects for all of us.

As a taster :

After a decade of private and public excess, Britain has a debt-ravaged economy for which deficit
reduction is vital.

The government’s deficit-reduction plan is critically dependant upon growth returning to pre-crisis levels, and a return to growth is essential anyway if the burden of wider (private as well as public) debt is not to prove too heavy for Britain to carry.

Government and opposition alike base their thinking on the assumption that, by one means or another, growth can be restored.

We see no reason whatever to assume this.

To focus on the deficit is to ignore the fact that the British economy had become debt dependant long before the financial crisis.

Together, private and public borrowing has averaged 11.2% of GDP since 2003.

Over the past decade, borrowing has driven up output in financial services (+123%), construction (+27%) and real estate (+26%), whilst lavish public spending has propelled expansion in health (+35%), education
(+27%) and public administration and defence (+22%).

Real output in all other industries is now 5% lower than it was ten years ago.

Between them, real estate, finance, health, education, construction and public administration are six
of Britain’s eight largest industries, and account for more than 58% of output. Yet the future
prospects for at least five of these six sectors are grim, because:

• Public sector spending cuts are modest, but growth is now a thing of the past.
• Net mortgage borrowing, critical to the real estate and construction sectors, has crashed,
• from £113bn in 2007-08 to a derisory £3bn last year.
• The aggregate of private (mortgage and credit) borrowing has now turned negative.

That sectors which account for 58% of output are hamstrung in this way leads us to believe that the fiscal and economic outlook is drastically worse than is generally assumed.

Full paper (pdf) here.