A comprehensive report has been released from the International Monetary Fund (IMF) warning that Britain’s finances are amongst the worst in the world, following the 2008 financial crash.
The report has stated that the UK could be susceptible to a recession and that there is a risk of a snapback in interest rates.
The IMF conducted a study on the wealth of 31 nations, finding that the UK’s public sector had almost £1tn in wealth wiped out in recent years, which put Britain in the second weakest position, with only Portugal in a worse state.
The report also highlighted that the growth of Britain’s public sector pension liabilities as well as the bailout of UK banks were key factors in the UK’s low ranking.
On the other end of the scale, Norway ranked as the most secure nation. The report said that this was because it had built on its publicly held oil wealth, in contrast to the UK, which allowed private sector companies to extract North Sea oil reserves and spent the tax revenues during the 1980s and 1990s.
The IMF also said the UK had historically weak public finances, with high levels of debt and low levels of assets. The report then highlighted the fact that Britain sold off many of its assets in the privatisations of the 1980s and 1990s and also did not create a sovereign wealth fund from its oil revenues, compared to Norway, which did.
The report said: “The United Kingdom balance sheet expanded massively during the crisis. Most of the expansion in the balance sheet was the result of large-scale financial sector rescue operations that resulted in reclassification of the rescued private banks into the public sector.
“[This] increased (non–central bank) public financial corporation liabilities from zero in 2007 to 189% of GDP in 2008, with similar [falls] in financial assets.”
The IMF report also stressed the danger that the on-going trade war between America and China has on the world’s economy, with the trade war set to take its toll on the American and Chinese economies in 2019.
“When you have the world’s two largest economies at odds, that’s a situation where everyone suffers,” said Maurice Obstfeld, the IMF’s chief economist.
Analysis: Alan Wheatley, Associate Fellow, Global Economy and Finance, Chatham House
The IMF’s assessment needs to be put in context. a country’s balance sheet is just one measure of financial health. Germany has relatively few assets but it runs budget surpluses. the IMF could have pointed to the sharp drop in the UK’s deficit from a peak of 10% of GDP to 2% now.
Is the UK really at greater financial risk than, say, Italy, which has more assets but a govt debt of 130% of GDP and no control over its monetary policy or exchange rate? And let’s not forget that the UK’s public sector assets were reduced because of privatisation in the 1980s – a policy widely acclaimed – and its liabilities were swollen by its necessary response to the GFC.
So we have to look at the stock and flow in the round. Having said that, the IMF report helpfully draws attention to two important issues: governments need to optimise the management of public sector assets and make serious plans to fund the pensions of their ageing populations.
Here the UK is far from alone. And one thing is sure: flogging the family silver – no matter how big the hoard – is a one-off palliative and noy a lasting remedy.