Deadly debts

The Government published a summary of its finances for the 2009/10 tax year this week. As expected, it makes grim reading, with borrowing equivalent to £34,000 per household..

Taxes and other revenues brought in £469.2 billion, a fall of 5% on the previous year.

Overall expenditures and investment were £631.1 billion, an increase of 7.5% on the previous year.

In other words, the Government spent £161.9 billion more than it earned. Add in local government and public corporation and the final deficit for the year comes out at £152.8 billion, equal to nearly £5,900 per household.

Worse still, this pushes the Government’s overall debt to £890 billion, equal to around £34,000 per household. And the final straw is that Government projections predict overall debt will rise to £1,406 billion by 2014/15, equal to £54,000 per household, which incidentally is about the same as the current level of personal debt per household including mortgages.

Now debt is not necessarily a bad thing provided you can afford the interest payments. But the Government can’t. The interest bill for 2009/10 was £30.9 billion, a cost of nearly £1,200 per household and it’s estimated to rise to around £70 billion a year by 2014/15, equivalent to £2,700 per household. To put £70 billion into context, it’s about half the total amount the Government currently raises in income tax each year.

So it’s quite clear, whoever gets into power at the forthcoming election will basically be up the creek without a paddle as far as finances are concerned. Spending will need to be slashed and/or taxes raised significantly to stop the deficit from soaring and sending interest payments further out of control. Neither will be comfortable given we’re still on the cusp of recession.

Greek finances have also been in the news again this week as its Prime Minister formally requested the previously arranged €40-45 billion bail-out loan from the EU and IMF (at a 5% interest rate). Greece has a deficit of around €300 billion, which may not sound so bad compared to our £890 billion. But Greece’s GDP (gross domestic product – basically total annual spending within a country’s economy) is far lower than the UK’s too, so that Greece’s debt is estimated at 116% of its GDP. This compares to 62% in the UK, i.e. Greece can far less afford to get out of its financial hole than we can.

Unsurprisingly, investors are demanding an increasingly high risk premium for holding Greek debt – the yield on 10 year Greek bonds is around 8.7%, about 5.7% higher than equivalent German bonds.

The debt story is going to drag on and on, meanwhile it will be interesting to see how stockmarkets cope. They’ve been surprisingly resilient of late.

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