Britain isn’t Portugal – but Osborne’s self-defeating policies will push us closer
Last week Portugal was forced into seeking a ‘bailout’ from the rest of Europe as markets lost confidence in its government, and borrowing costs soared.
George Osborne was quick to claim that this vindicated his strategy of aggressively cutting spending in order to appease the financial markets and avoid a similar fate for Britain.
But Osborne’s analysis was flawed on two levels. First, Britain is in a very different position to Portugal, and, second, one of the primary reasons Portugal has been forced into seeking help is because austerity policies, of the kind Britain is embarking on, have been tried and failed.
Here are five differences between Britain and Portugal.
- Britain has its own currency. By allowing the pound to fall in 2008-09 Britain regained international competitiveness (making its exports cheaper to trading partners) – an option not available to Euro-member Portugal.
- The UK has its own central bank which can set interest rates appropriate to the economy. Portugal lacks this and with in hours of it requesting a bailout the European Central Bank raised interest rates – a harm move for struggling Portugal (and for Greece, Ireland and Spain).
- The UK ratio of government debt to GDP (national income) is 58%, modest by international standards (pdf). In Portugal it is closer to 90%.
- The average maturity of British government debt – how long we have until it has to be paid back or refinanced – is 14 years. In Portugal it is less than 7 years. The UK’s longer term debt makes it more manageable and stable.
- The markets are currently prepared to lend to the UK government at around 3.75% interest – near record lows. In other words they aren’t worried about getting their money back and perceive the UK as a good credit risk. In Portugal it was costing the government nearly 9% to borrow.
So the UK is highly unlikely to experience the kind of loss of market confidence that hit Portugal.
But the second key point is that Portugal has been experimenting with exactly the same kind of austerity policies that Osborne has introduced in the UK: raising VAT and cutting public sector spending. The Portuguese finance minister also talked up the prospects of ‘export-led growth’ – another Osborne theme. The result has been lower growth, higher unemployment and ultimately a higher deficit – just as happened in Greece and Ireland.
Britain is unlikely to experience the loss of market confidence that hit Portugal, but Osborne’s self-defeating policies will push us closer to it.
Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.
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