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"Prof Helm reckons that sustainable consumption in Britain “may be as much as 20 per cent lower than at the peak in 2006-07”.
But try telling the British or American publics that they might have to accept a 20 per cent drop in living standards.
That might be OK for Argentines or Estonians – but not in London or New York, and certainly not now."
Consider what would happen if the UK or US were to attempt Hungarian or Estonian style cuts.
There would be a huge outcry.
So rather than taking the axe to public spending, the British and American governments are borrowing madly,
with no sign of any credible long-term plan to balance the books.
Gideon Rachman, Financial Times, May 25 2009
The US, according to the Congressional Budget Office, now has an annual structural budget deficit of 5 per cent of gross domestic product. In Britain, public debt as a proportion of GDP is set to double.
Both countries are in the fortunate position that the markets will still lend to them. In spite of last week’s warning from Standard & Poor’s, the rating agency, about rising public debt, Britain has (so far) retained its triple A credit rating. Despite President Barack Obama’s stern words earlier this year that a “day of reckoning has arrived” in which America would finally have to address “critical debates and difficult decisions”, the US is planning to run huge budget deficits for the next decade and beyond.
The obvious risk is that when a real day of reckoning does arrive it will be that much tougher. In Britain, Dieter Helm, a professor of economics at Oxford university, is one voice sounding warnings. “The fundamental cause of the current crisis is that consumption has been unsustainably high, based on borrowing too much, investing too little and saving too little,” he says. “If we continue to try to spend even more, and borrow ever greater sums, the eventual effect on the standard of living will be commensurately greater.”