Fiscal fiascos

One year into the UK's new Labour government, which promised to 'kickstart economic growth', its plans for economic renewal are in disarray.

The Office for Budget Responsibility (OBR), which supposedly gives objective and independent economic forecasts, said this week the UK faces "daunting" risks to public finances thanks to its soaring debts. The UK's national debt is about £2.8 trillion ($3.8 trillion), close to the country's entire value of its goods and services.

Britain is experiencing stagnant economic growth, barely more than 1% is likely in 2025. At the same time inflation is almost certain to exceed 3% this year.

No one in government will admit it, but stagflation - no economic growth combined with high inflation - is here. Deutsche Bank analysts are not alone in seeing the current decade as similar to the 1970s, "a terrible decade for equities and bonds across multiple countries" they say. It was a decade when Britain technically went bust.

Between May 1972 and December 1974 the UK stock market lost an astonishing 73%. The Labour government of 1974 didn't have an overall majority, unlike today's, but it was just as split by competing factions. By June 1976 the Pound Sterling reached a then record low against the Dollar.

In December 1976 the Labour government humiliatingly called on the International Monetary Fund (IMF) for a loan of almost $4 billion, about $23 billion (almost $17 billion) in today's money, then the IMF's biggest loan.

Many economists fear that the UK may be about to repeat the past, that it's sinking under pressures from all directions. Strikes by public sector workers seeking to reverse 'pay erosion' threaten to unbalance the government; junior doctors (now called resident doctors) have now overwhelmingly voted to strike for a 29.2% pay rise, which the government says it will not meet.

America's debt will grow

Meanwhile the US national debt - now above $37 trillion (£27 trillion) - will grow by $5 trillion, a result of President Trump's tax-cuts and spending Bill that has now become law. One of its moves is to raise the current $36.1 trillion borrowing limit by that amount. Independent forecasters anticipate that $3.4 trillion will be added to the nation's debt over the next ten years. The new legislation will reduce tax revenues by $4.5 trillion, cut spending by $1.2 trillion, and lose almost 11 million people their federal health insurance over the next decade, says the non-partisan Congressional Budget Office (CBO). The White House disputes the CBO's assessment.

BlackRock, the US multinational investment company, warns that foreign buyers' appetite for US debt may be diminishing. It said with "foreign investors stepping back and the government issuing more than half a trillion Dollars of debt weekly, the risk of private market being unable to absorb this debt and consequently pushing government borrowing costs higher, is tangible."

Debts swell across the world

The Bank of England (BoE) reported that in 2024 there were no debt defaults among advanced economies, such as the US or the UK. At the same time general government debt globally was a record in 2023 of almost $98 trillion (£72 trillion), which was 93% of global gross domestic product (GDP).

Neither the UK nor the US can go bankrupt in the conventional sense, as both can print their own fiat currency. But confidence in the global currency, the Dollar, could evaporate while in the UK a fiat currency crisis could create financial instability and forced austerity.

Both the UK and the US are still struggling with the massive injections of cash, unfunded by tax revenues, they blithely oversaw during the Great Financial Crash of 2008 and the Covid-19 pandemic.

The British government made much of what it called a fiscal 'black hole' of some £22 billion it inherited from the previous Conservative administration. It promised that the public sector's daily costs would be met by existing revenues, which now looks impossible; it pledged not to increase income tax. That promise is now threadbare. In the US the national debt may well be reaching its limit; buyers of government debt in both countries may start demanding much higher interest, which will only worsen the problems.

The temptation will be to print more paper money to cover higher future bills. The creeping devaluation of your fiat money has a secure answer - buy and use gold with Glint.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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