Bank of England chief King ready to pump more cash into economy as debt hits 1trillion
The Bank of England is ready to pump billions of pounds more cash into Britain’s stalling economy, Sir Mervyn King suggested last night.
It came as it emerged that the national debt has surged past 1trillion for the first time – and now stands at the equivalent of 40,000 per household.
Official figures yesterday showed the grim milestone was reached at the end of 2011, despite a bigger than expected fall in borrowing in December.
Quantum leap: Governor of the Bank of England Mervyn King said the Bank would act and extend the quantitative easing asset purchase scheme if growth stalled.
And yesterday the International
Monetary Fund said the world economy has fallen ‘deeply into the danger
zone’ due to risks from the debt-ridden eurozone.
HOW OUR DEBT MOUNTAIN SOARED
The
Government's 1trillion debt mountain is the legacy of nearly a decade
of the state living beyond its means and the pain caused by the
financial crisis.
The debt,
which is measured as the state's liabilities minus its cash, only
increased gradually in the early part of the century when the economy
was booming.
But the financial crisis sparked an explosion in Whitehall borrowing.
Net
debt, excluding the short-term effects of financial interventions such
as bank bailouts, rose to 1,003.9bn in December – nearly double the
534.6billion figure at the end of 2007.
This
figure does not include the liabilities of the part-nationalised banks,
which are due to be sold in the future. When the full impact of the
nationalisations are added in, net debt hit 2.3trillion, or 149 per
cent
of GDP.
The surge in
borrowing was also brought about by the recession, as the UK suffered a
big crash in GDP lasting for six successive quarters – hurting the
Government's tax haul. GDP is still 3 per cent below its peak.
The
Labour administration did not cut spending in line with the fall in its
income and instead opted to borrow more to stimulate the economy. Its
initiatives included a car scrappage scheme and a cut in VAT to 15 per
cent.
Sir Mervyn hinted he would use more Quantitative Easing if it would prevent the UK tipping into a double-dip recession. The Bank is already committed to 275billion of QE.
The Bank governor said last night: 'With inflation falling back and wage growth subdued, there is scope for interest rates to remain low and, if necessary, for further asset purchases.'
The Bank pours money into the economy by buying assets such as Government bonds from banks and other financial institutions. This boosts their coffers and injects cash into the banking system which can then lend it to households and small firms.
Sir Mervyn also said families had been hit by a 'ferocious squeeze' on their spending power and that households are suffering the longest period in which real wages have failed to rise since the 1920s.
The IMF has slashed its forecast for UK growth to 0.6 per cent from 1.6 per cent for this year. But it predicts that Britain will be the best-performing economy in Europe over the next two years as nations such as France and Germany pay the price for their membership of the stricken euro.
Figures today are expected to show the UK economy ground to halt or even went into reverse at the end of last year. Economists are expecting anything between a 0.7 per cent slump and a 0.1 per cent rise in gross domestic product in the final quarter of 2011.
But IMF managing director Christine Lagarde said countries in the eurozone will fare even worse, entering 'a mild recession' this year.
It set a grim scene for single currency leaders gathering in the ski resort of Davos in the Swiss Alps this week for the 2012 World Economic Forum.
Soaring: At 1,003.9billion, Britain's public sector debt stands at 64.2 per cent of GDP, up from around 30 per cent at the turn of the century
One bright spot for Britain was a
larger than expected fall in Government borrowing to 13.7billion last
month, down from 15.9billion in December 2010. That put George Osborne
on course to hit his borrowing target of 127billion this fiscal year.
UK GROWTH FORECASTS SLASHED
The
UK saw its economic growth forecasts slashed by the International
Monetary Fun today – but the country will still outperform its
struggling neighbours in the eurozone.
Britain is expected to grow at just 0.6 per cent this year, down from a previous forecast. of 1.6 per cent.
The
economy will now grow at 2 per cent in 2013, down from 2.4 per cent,
the IMF said. The figures have been revised down because of the on-going
eurozone crisis.
The global economy will grow by 3.25 per cent this year – down from a previous estimate of 4 per cent.
Tomorrow GDP figures are expected to show the UK economy ground to a halt in the last three months of the year.
Some
analysts have said the figures may show Britain is experiencing
negative economic growth. However, technically this is not a recession
as growth has to be below zero for two successive quarters.
The
UK is still expected to outperform Germany and France this year, which
are expected to grow by 0.3 per cent and 0.2 per cent respectively, but
will fall behind the US and Japan, which are expected to grow 1.8 per
cent and 1.7 per cent apiece.
The total borrowed in the first nine
months of the fiscal year stands at 103.3billion – more than 11billion
less than the 114.6billion shortfall at the same point a year ago.
Nida Ali, economic advisor to the Ernst & Young Item Club, said: 'Yet another encouraging month for the Chancellor. The Government has made good progress in consolidating the public finances so far and there’s still a good chance that borrowing will undershoot the full-year forecast.'
But she added: 'The longer-term outlook remains very uncertain and the recent strong trends will be increasingly difficult to sustain.'
Government spending fell last month as the austerity measures kicked in, while the tax haul rose with the help of last year’s VAT rise to 20 per cent and the new levy on banks.
But it was not enough to stop the national debt soaring to 1.004trillion, or 64.2 per cent of GDP and 40,000 for every household.
The figure excludes bailing out Britain’s basket case banks. When these interventions are added, net debt hit 2.3trillion in December, which is 149 per cent of GDP.
Vicky Redwood, chief UK economist at Capital Economics, said the figure was a reminder of the 'enormity of the challenge that still lies ahead to get the public finances back on a sustainable footing'.
She said: 'The trillion debt figure has mainly been caused by the adverse impact of the recession – a big role was played by the drop in GDP and the knock-on effects for public finances.
'It could also be argued it was also partly due to Labour overspending before the public crisis.'
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In its latest World Economic Outlook, the IMF predicted that the UK economy will expand by 0.6 per cent this year and 2 per cent next year.
Shadow Chancellor Ed Balls said: 'The time has now come for David Cameron and George Osborne to realise their economic gamble – cutting spending and raising taxes too far and too fast – has backfired.'
But a Treasury spokesman said yesterday: 'That our national debt has reached more than 1trillion simply shows the unsustainable level of spending this country built up over the past few years, and shows why it is critical for our nation’s future that we deal decisively with the deficit.'
Mind-boggling: 1trillion of British debt could be stacked on ten thousand pallets of 100million each, stretched 50 wide, 100 deep and two high. It covers an area of 115 yards by 136 yards – nearly twice that of a football pitch
The UK's debt level is second only to that of Japan among major economies, including the U.S. and Spain. The figures here are calculated on total debt liability which includes the future cost of pensions
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