The IMF recently downgraded its growth forecast for the UK following the escalation of conflict between the US/Israel and Iran. All major economies saw downgrades, but the UK’s was the largest.
Even so, the IMF still expects the UK to be among the better-performing advanced economies. That didn’t make the headlines. Instead, we got the usual noise: more talk of economic chaos, and—inevitably—plenty of low-grade misogyny about “Rachel from accounts”.
But the more important story was buried in the report. The advanced economies are drifting towards a debt problem.
There are two parts to this. First, overall debt levels are high—close to 95% of GDP across advanced economies, although Japan accounts for a large share of that. Second, most of these countries are still running deficits: they are spending more than they raise in revenue.
Canada is the closest to balance. It’s tempting to credit Mark Carney, the former Governor of the Bank of England, but Canada’s relative fiscal discipline predates him.
The UK, surprisingly, is one of the few relative bright spots.
When Labour came to power, the government was running a deficit of around 6% of GDP. That had been the pattern for years. It was the backdrop to the “£20bn black hole” line that dominated coverage of Rachel Reeves’ first budget—a figure that was always more political shorthand than economic reality.
In truth, the gap in the public finances was larger than that. £20bn just happened to fit neatly into a headline.
Since then, the deficit has fallen to around 3.5%, and the IMF expects it to drop to roughly 1.5% by the end of this Parliament. On that trajectory, the UK would sit just behind Canada in terms of fiscal tightening among major economies.
That goes some way to explaining why financial markets have been relatively relaxed about Reeves, despite the constant criticism. She is, quietly, repairing the public finances.
Borrowing costs are rising globally, as the prospect of recession and inflation—partly driven by US policy—pushes yields up. But UK government bond yields have risen less sharply than in many comparable economies. Debt interest, as a share of GDP, is beginning to edge down from its recent peak.
If a broader debt crunch is coming, the UK is at least moving in the right direction.
Now for the less comforting part.
The US is running a primary deficit of around 7% of GDP—roughly double the UK’s—and the IMF expects that to increase further over the next few years.
Much of this reflects repeated rounds of tax cuts. Large parts of the American right still place near-religious faith in the Laffer Curve: the idea that lower taxes pay for themselves by boosting growth.
The evidence for that is, at best, thin. But the policy persists.
For decades, this didn’t seem to matter. The US benefited from issuing the world’s reserve currency, and from the central role of the dollar in global trade—especially oil. That made it easier to borrow, and cheaper to sustain higher levels of debt.
US debt now sits at around 125% of GDP and continues to rise. Unlike the UK, there is no clear political consensus around stabilising it. The scale of US borrowing is so large that the IMF often publishes advanced economy data both including and excluding the US, simply to make the rest visible.
Debt interest tells its own story. In the UK, it is around 7% of government spending and falling. In the US, it is closer to 17%—and rising.
We may think we’re living through a cost-of-living crisis. Or a growth crisis.
But there’s a reasonable chance we’re edging towards something bigger: a sovereign debt problem in the advanced world.
And if that’s right, the uncomfortable conclusion is this—
The most powerful economy in that system may also be its weakest point.
I disagree with your “Large parts of the American right still place near-religious faith in the Laffer Curve: the idea that lower taxes pay for themselves by boosting growth”– and would prefer “Large parts of the American right still abuse the idea of the Laffer Curve to argue that lower taxes pay for themselves by boosting growth.”
The Laffer Curve is certainly real in the sense that taxes at too high a rate are counter-productive as they suppress economic activity, but I doubt that even US right-wingers believe that taxes are that high currently (and doubly not in the US)!
When they argue that lower tax rates will bring higher tax revenues they are lying, not even sincerely deluded.
… and Governments have lots of ways they take money off people, including student loan repayments – some of these do demonstrate laffer style behaviour
https://www.youtube.com/watch?v=uhiCFdWeQfA
Laffer himself never intended that his curve would be an actual policy tool. It was always just a way of thinking about tax yield. The US right (and chunks of the UK right) believe that it is possible to calculate the laffer curve for an advanced economy, and that magically we are always on the right hand side of the curve, and therefore tax cuts fund themselves. Neither of which are true. They are magical beliefs