The Golden Opportunity to Move Towards
A Wisdom Based Global Economy

Innovation & Productivity, National Debt & Unemployment

London, UK - 21st October 2008, 09:25 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

When government spending outpaces receipts as economic growth grinds to a halt and goes into reverse, we can expect the net Public Sector Borrowing Requirement (PSBR) to go up and this affects the long term national debt. In some countries, conditions are looking more deteriorated today than they have ever done since the second world war. There is a case to be made for increasing national debt in a Keynesian way if that money goes into innovation to raise productivity, long term investment and infrastructure projects which add to a nation's productivity for decades to come. Clean energy, sustainable technology, eco-friendly infrastructure, pure air and water projects, as well as micro-finance all have the power to unleash innovation to propel us "Towards The Golden Age: A Wisdom Based Global Economy" which ATCA published on 23rd May 2008 on mi2g.net. However, if the rise in national debt fuels wage increases and inflation, then it can have adverse runaway effects. Although most G7 countries are going to display further deterioration in PSBR and long term national debt let us look at the case of the UK as an example:

Comparison with the Rest of the World

Prime Minister Gordon Brown has said that UK's public finances are in much better shape than most developed countries. He adds that the UK's lower net debt as a share of GDP than most other countries means it is able to borrow more to support the economy in a global downturn. This figure stood at 43.4% of GDP in September including nationalised Northern Rock's liabilities and at 37.6% otherwise. Comparing the level of UK national debt with that of other nations, IMF figures show Britain owing 37.6% of GDP, compared to USA on 46.3%, France on 55.5%, Germany on 56.1%, Japan on 94.3% and Italy on 101.3%. This means that Mr Brown's golden fiscal rule -- the sustainable investment rule -- which says that national debt must be below 40% of national income, is going to be breached. However, the UK Treasury insists the fiscal rules allow for "temporary and exceptional events" ie Northern Rock, which means, it argues, they do not have to go on the balance sheet. Then, of course, there is the additional matter of the GBP 37bn bailout of RBS, HBOS and Lloyds TSB, which takes the level of national debt even higher. Yesterday, as he addressed MPs, the PM's main line of defence was to offer comfort that the UK's neighbours had borrowed much more, so it was alright to pile on more national debt.

UK Budget Deficit Swells To Post Second World War High

In the second quarter, UK's GDP growth was non existent. The UK's finances have been hit as tax revenues fall and benefit spending rises to cushion the economy whilst it decelerates towards recession. Further, the deepening housing slump and the credit crisis are hammering the earnings of financial firms including banks, which contribute a quarter of all taxes from corporate profits to the UK government. This is likely to depress government receipts from tax for years to come. As a result, the UK net PSBR is going to continue to soar. The second consecutive monthly record boosted net borrowing for the first half of the fiscal year, which started in April, to GBP 37.6 billion, the highest level since records began in 1946 and higher than for the whole of the previous year! Yet despite all the creative accounting, Britain's net annual borrowing could hit a mighty GBP 64bn this year, GBP 100bn the next and as much as GBP 120bn by 2010 -- the year of the next general election. Total national debt to GDP is likely to break through the 50% barrier in the coming months.

UK Finance Minister -- Chancellor of the Exchequer -- Alistair Darling's March forecast of GBP 43 billion of net public sector borrowing this year is now likely to be breached. He also said that net PSBR would fall to GBP 38 billion next year which is also looking highly improbable. The Chancellor has now said that he is ready to spend his way out of a looming recession. He is keen to switch spending to employment-creating sectors. Mr Darling has singled out housing, energy and small businesses as areas that ought to benefit from a "reprioritizing" of government-spending plans. In parallel, the UN has suggested the global downturn would raise world unemployment to 210m people by the end of next year, its highest rate for a decade.

No Free Lunch

The pain from excessive debt cannot be delayed forever. Once the present global financial crisis abates, the present UK government, or its successor, are likely to have to introduce a combination of new tax raising measures and further spending cuts as a share of national income to reduce net borrowing (PSBR) and national debt.

Innovation to Increase Productivity

Improving productivity via innovation remains the key. This ought to be the laser sharp focus as the global economy metamorphoses towards the New Golden Age of a Wisdom based Global Economy. It is important to understand what is being done about raising national productivity via innovation whilst mounting national debt in the key areas of clean energy, sustainable technology, eco-friendly infrastructure, pure air and water projects as well as microfinance. In parallel, there ought to be a systematic targeting of the bloated spending base: taking out unnecessary white elephant projects and their associated costs; moving towards a distributed as opposed to centralised power architecture; reducing our overall cost base and expense levels; and improving our efficiency to face the global downturn in a resilient way.