When Britain’s new Chief Secretary to the Treasury, David Laws, walked into his office last week, he found a letter from his predecessor, Liam Byrne. Laws assumed it contained useful advice.
But when he opened the envelope, he found that the letter – which he characterized as “honest but slightly less helpful” than he had expected – had only a single line:
Dear Chief Secretary, I’m afraid to tell you there’s no money left.
And so there isn’t. Americans don’t realize just how bad Britain’s situation is. True, Britain’s not in the Euro, which is a huge help. But Britain’s got a larger structural deficit – in other words, the deficit after you factor out the effects of the recession – than Greece, and its borrowing one pound for every four it spends. It will take years for Britain to recover from the pain New Labour has inflicted.
If only we were so lucky. As Edmund Conway pointed out last week, the U.S.’s situation, according to the International Monetary Fund, is if anything even worse than Britain’s. While Britain’s debt has grown rapidly since 2000, the growth at least looks likely to stall by 2015, if the new British government carries through on its pledge to cut spending.
On the other hand, there’s the U.S., where debt is increasing far faster than almost any other country. And because the average maturity on U.S. debt is relatively short, the U.S. will need to sell a lot of debt very quickly, which means the U.S. is even more vulnerable if the market suddenly decides to demand higher interest rates. As the IMF puts it, “the U.S. [needs] to reduce its structural deficit by the equivalent of 12% of GDP, a much larger portion than any other country analyzed except Japan.”
And it gets better. These numbers don’t reflect the effects of Obamacare, or any more emergency spending (‘stimulative’ or otherwise). Nor do they reflect the fact that, if taxes are held at their historic levels, entitlement spending will by 2052 consume the entire federal budget, leaving nothing for the national defense or even interest on our debt mountain.
Mr. Laws may not see it this way, but his predecessor’s joking letter may have done him, and his country, a favor by dispelling any remaining illusions about how badly off Britain is. If only President Obama could find a similar letter on his desk in the Oval Office tomorrow morning.