We are on the eve of the US President's economic speech, and the UK Chancellor's Pre Budget Report. They will be somewhat different statements.
The authorities in both countries made bad mistakes with monetary policy between 2004 and 2008, first pumping it up too much, then imploding credit too quickly. Both countries ran up large public deficits in the good times, then increased the deficits dramatically in the bad times. Both offered large amounts of support to overextended banks. Both have governments with a love of public spending regardless of the state of the finances. Both have been running large balance of payments deficits.
The Statements are likely to reveal, however, that the UK is in a worse position than the US. The US downturn was shallower and ended earlier, limiting the financial damage. The US economy has narrowed its large trade deficit more, the UK less, despite both following weak currency policies. The US banks in trouble were smaller relative to the size of the government and the economy than the UK ones. The US banks have made swifter progress in sorting themselves out and repaying the public assistance than RBS or Lloyds in the UK.
As a result the President has the pleasant task of reporting large sums of cash returned by the banks. He could use this to cut the amount of debt he needs to raise and service, or he can spend more on employment generating programmes. He will probably do a bit of both. A sustained recovery does require action to curb the deficit, so the more he can use to cut borrowing the better. The US has two other great advantages compared to the UK. It has the world's reserve currency, which many will need to hold regardless. Sterling enjoys no such comfort. The US owes so much to large creditors like China that there has to be give and take on both sides as they size up the US borrowing needs in the months ahead and the Chinese investing needs. Sterling government debt is not in the same league, so it can be treated differently by the big creditor nations. The UK still has to come off quantitative easing. When it does so foreign buyers of government debt are likely to want a higher interest rate for their trouble.
The UK Chancellor should set out just how he intends to halve the UK deficit over the next four years. He has promised to do this through his Deficit Reduction Bill, but has so far given little detail. The current deficit is running at over £180 billion. This means spending cuts or tax increases to the tune of £90 billion to halve the deficit. The deficit by the end of the four years would then be at the high level that triggered the IMF crisis for the UK in the 1970s, so the target reduction is in one way not very demanding. In other ways it is a big task, requiring far larger cuts and tax increases than any previous exercise since the Second World War.
We should expect some pre-election smoke and mirrors rather than comprehensive spending reductions that can cure the structural deficit. The Treasury may well argue that some of the £90 billion will come from the growth of the economy, gradually cutting the cyclical part of the deficit. It is difficult to believe the cyclical element is as much as half the total, and the cyclical recovery surely is needed to cure the half of the deficit the government does not propose to cut. The deficit reduction should concentrate on the structural deficit, the part that comes from inefficient or less desirable spending.
There will be spending cuts outlined. Most of these are likely to revolve around the new found enthusiasm for efficiency gains. We move into a world of Gershon plus, finding new ways of curbing costs. There may be more cuts along the lines of the announcement of an end to the central computer procurement in the NHS.
At the time of the Budget the government's forecast of £175 billion of deficit this year (excluding banks) was said to be an overestimate, reflecting deliberate caution by the Treasury. The briefers briefed that the outturn would be lower, and loyal commentators duly obliged by writing that the government had at last got on top of its growing deficit and was now taking no risks with its forecast of an unpleasant surprise. Ahead of the PBR the briefing now goes that the government will only overrun its forecast by a little bit. The deficit we are assured will not hit the £200 billion estimated by some private sector pundits. We should beware of briefing from the usual sources this close to an election. We need to study the small print carefully. The UK finances are in a dreadful state. The longer they delay tackling them, the worse it will be when they do.
We continue to advise against owning UK gilts. Interest rate rises on UK government debt are likely over the next year. The UK economy is declining relatively, falling to lower places in the tables of economic size and competitiveness.