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Tullett Prebon Press Releases

26 Jul 11
Stratefy Insights Issue Seven - Avoiding economic armageddon - Drastic measures for desperate times


Tuesday July 26, 2011:
 The  Government needs to  push through  radical supply side  measures  in order  to  stimulate growth and  avoid a looming debt disaster for the UK  economy,  says a new report from  Dr Tim Morgan, Global Head of Research at Tullett  Prebon. 

The report, Thinking the unthinkable: the final report of Project Armageddon, says the UK is  caught in  a  high-debt, low-growth trap. Britain's flat-lining, debt-addicted post-bubble  economy cannot generate sufficient growth to sustain levels of debt which are far higher  than is generally realised.  As a result, the Government's  plan to reduce public borrowing  hinges on assumptions about growth that are much too optimistic. 

“The British economy, as currently aligned, is incapable of delivering growth at anywhere  near the levels required by the deficit reduction agenda,” says the report. The underlying  problem is that, during the bubble which preceded the crash, the UK became dependent  upon private borrowing and public spending. A swathe of industries, encompassing real  estate, construction, finance, health, education and retailing, and responsible for 70% of  economic output, have been rendered ex-growth by the slump in private borrowing and the  ending of unaffordable expansion in public spending.   

Dr Morgan argues that the ruling  Coalition is right to  argue that the fiscal deficit must be  eliminated and the Labour opposition is correct that fiscal tightening will undermine growth.  Whilst the fears of both sides are accurate, neither set of prescriptions will work.  

“The widespread assumption that the right blend of macroeconomic policies alone can  overcome Britain's economic and fiscal problems is fundamentally mistaken,” Dr Morgan  says. “With all the macroeconomic options exhausted, the only way to restart growth  is to  implement supply-side reforms designed to free small and medium enterprises from the  onerous burden of regulation that blights their expansion.” 

“Businesses in the UK are crippled by government interference and by the excessive  demands of the state machine,” Dr Morgan argues.   

However, Dr Morgan warns that, while such reforms are imperative if a full-blown economic  crisis is to be avoided,  there will be strong opposition from vested interests and public  opinion may be against the scale of reform required. 

“An early objective for government should be to put an end to the state of national denial  over the true condition of the economy and to undercut the delusory sense of individual and  collective 'entitlement' that was fostered in the Labour years,” Dr Morgan says. 

The conclusions are  based on Tullett Prebon's  Project Armageddon analysis of  the scale  and nature of Britain's economic plight, and whether the Government or Opposition has the  right strategy to fix it.  

The analysis shows that although the UK public debt is reported at 60 per cent of Gross  Domestic Product (GDP), that rises to 75 per cent of GDP if measured on the Maastricht  criteria used by Eurozone problem economies including Greece, Ireland and Portugal.  Adding in unfunded public sector pensions and public-private finance commitments would lift  the deficit to a staggering £2.46 trillion, or 167 per cent of GDP. Trend growth, the report  argues, may struggle to reach even half of the 2.9% rate on which current plans are  predicated. 

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