BRITAIN DEALS WITH A SURPLUS

PAYING OFF THE DEBT HAS ITS COSTS

ANDREW PHILLIPS May 1 1989

BRITAIN DEALS WITH A SURPLUS

PAYING OFF THE DEBT HAS ITS COSTS

ANDREW PHILLIPS May 1 1989

BRITAIN DEALS WITH A SURPLUS

PAYING OFF THE DEBT HAS ITS COSTS

When Britain’s chancellor of the exchequer, Nigel Lawson, delivered his sixth budget last month, he did so amid rising concern about his country’s economy. With inflation running at almost eight per cent and an international trade deficit running at $36.5 billion annually, experts expressed fears that Britain’s celebrated economic revival was in danger of stalling. But despite those problems, Lawson was able to make an announcement that by Canadian standards would be little less than revolutionary. Instead of running a deficit, he told the Commons, the British government had recorded a budget surplus of $30.2 billion in 1988-1989— and would pile up another surplus of the same size in its $393.5-billion budget for 1989-1990. Said Lawson: “Nothing like this has ever been achieved in the past 40 years.”

Britain’s performance was in sharp contrast to that of other major industrial countries, including both Canada and the United States, which have large deficits despite several years of rapid economic growth. Britain has succeeded not only in eliminating its annual deficit but in actually starting to pay off its national debt. That performance has not won universal ac-

claim, however. Financial markets in Britain have given only a cautious welcome to the government’s new balance sheet—and most economists say that the budget surplus is less impressive when other factors, such as the sale of state-owned companies, are taken into account. At the same time, some of the government’s critics claim that it is destructive to have a surplus when the government should be investing more in public services.

Power: When Prime Minister Margaret Thatcher’s Conservatives took power in May, 1979, the deficit (measured in Britain as the Public Sector Borrowing Requirement [PSBR]) stood at $22.9 billion—equivalent to 5.25 per cent of the country’s gross domestic product (GDP) at that time. Since the early 1980s, the Tories made cutting—and eventually eliminating—the PSBR their top budget priority. They squeezed government spending hard and laid off thousands of civil servants. Then, after the deep recession of the early 1980s, the economy expanded rapidly, government revenues soared and Lawson was able to reverse years of deficit spending. As a result, the surplus marked the first time since the government earned a small surplus in 1969 that the coun-

try’s overall debt—now $318.5 billion—could be reduced. At the current rate of repayment, it could be eliminated by the end of the century—which, based on current trends, would make Britain unique among major Western industrialized nations.

Surplus: Still, some British economists maintain that Lawson’s announcement of a budget surplus does not accurately reflect Britain’s financial situation. They note that the chancellor himself acknowledged in his budget speech that $15 billion—almost half of the surplus— represented the proceeds of privatizing publicly owned companies such as British Airways and British Gas. And some experts in public finance say that Lawson did not make clear that other sales of government assets—especially public housing and land— had also contributed to the surplus. Cambridge University economist Wynne Godley, a critic of Lawson’s policies, estimated that those sales raised $6.5 billion. He said that the government also saved $10.7 billion that it would have invested in the privatized companies had they remained in government hands. If all that money were excluded from last year’s budget, he said, Britain would be running a deficit of about $2 billion. As a result, Godley says that Lawson’s claims of a surplus “are misleading.” The government’s political opponents have attacked Lawson on another front, as well, claiming that he has accumulated a budget surplus only by letting Britain’s public services and economic infrastructure deteriorate. They point out that public investment has fallen from about six per cent of GDP two decades ago to less than two per cent now. Labour Party leader Neil Kinnock compared him to a homeowner who insists on repaying his mortgage while the roof of his house is leaking.

Similar warnings have been sounded within Thatcher’s own party. John Biffen, a Tory MP and former cabinet minister, said that the Conservatives risk losing the next election unless they embrace what he called “the Tory tradition of social spending.” Even one member of Thatcher’s cabinet, Secretary of State for Wales Peter Walker, issued a thinly veiled criticism of Lawson’s policies in mid-April by urging more public spending and investment. And in London’s financial community, many budget analysts were unimpressed by Lawson’s surplus. Said Paul Davis, an economist at stockbrokers USB-Phillips & Drew: “There’s absolutely no reason to think that because you are operating large surpluses you can do wonderful things with the economy.” For Thatcher, the lesson may be that eliminating deficits is no guarantee of political success.

ANDREW PHILLIPS in London