Why governments will be forced to cut back next year

Dec 16, 2009, 01:53

David Stevenson

Posted byDavid Stevenson

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2009 has seen government goodwill to all men. But as this reverses in 2010, the world – and not just in finance – could get very nasty.

This year, politicians around the planet have tried to bounce their countries out of recession. But they've spent much more than they've raked in from taxpayers. So they're borrowing more than ever before. By the end of 2009, global sovereign debt will hit almost $50 trillion.

Yes, that's right – 50 million million dollars. Servicing this debt alone will cost over 6% of the global tax take in 2010, up from 2007's 4.3%. And there's only one real answer. Governments, whatever they say now, will have to take a chainsaw to their spending.

Ireland has started cutting. It's just lowered spending by €4bn – but that's still less than the interest bill on the country's national debt. Greece, which is in huge trouble, as we talked about last week, hasn't yet.

Nor has Britain. The Chancellor's Pre-Budget Report was based on little more than the hope that our economy will recover enough to pay his bills. As for the States and its $14bn debt in 2010 – don't ask.

So what happens now? Global bond markets, which get called on to plug the cash gap for overspending politicians, will demand two things before they lend all this extra money.

First, a higher return on the bonds they're buying. That's to compensate for the extra risks they're running. It means long-term interest rates will be forced up (as yields rise, bond prices fall) as we forecast last month. As Jeremy Warner says in The Telegraph, "a bond price crash is the surest bet in town".

Second, huge state spending cutbacks. This will mean big public sector pay cuts, fewer welfare benefits and no more 'stimulus' schemes. Taxes will also be hiked. Many economies will zap back into recession. Then, says Moody's, we could see "social unrest". That's rating-agency speak for riots in the streets, as public anger boils right over. But cash-strapped governments will be powerless to stop this.

In essence, we've lived on borrowed money for far too long. And with a real double whammy - more costly money, and much less cash government around - 2010 will be the start of payback time.

In the financial markets, that's not only bad news for bond prices; cyclical stocks, which depend on economic growth for their profits, could get severely crunched. High-yielding defensive shares look just about the best bet for 2010.

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  • 1. Stephen B

    (16 December 2009, 04:38PM)  Complain about this comment

    At my local (small town) library on saturday, I saw about 9 members of staff (there were only about 5 readers). The public sector is saturated with people twiddling their thumbs trying to look busy; at the same time some departments are genuinely over-worked and under-staffed. I fear that, if and when the expenditure reductions are made, our essential services will end up taking a battering (merely because the staff are too overworked to get political) whilst the fluff will remain.

  • 2. John

    (16 December 2009, 05:50PM)  Complain about this comment

    Right-wing governments around the world may well attempt to cut back the size of the state and its profligate spending, that is their natural inherent tendency, but socialist governments will certainly resist with all their persuasive vocal force and strategic guile. Left-wing governments generally only exist to take wealth from those who create it and give to their supporters who tend to have little or none. The raison-d'etre of Socialists is to provide ever more benefits and services to their populations. That is how the voters are bribed. In Britain over 60% of the population now receive some variety of state benefits. A cynic may well say that Labour has intentionally cultivated that dependency in order to maintain itself in perpetual power? To cut back this dependent culture would be anathema. Their preferred alternative will be to sit tight and wait for inflation to degrade the deficit and/or create new electronic money to pay off the most urgent bills.

  • 3. ThatLindseyGuy

    (17 December 2009, 03:14PM)  Complain about this comment

    I'm reliably informed that the United States debt is somewhat larger than the $14 billion stated in paragraph 5.

  • 4. Nev

    (20 December 2009, 08:41PM)  Complain about this comment

    The political colour of our leaders is pretty irrelevent. We are in the slipstream of the largest and most powerful economy on earth. The USA.
    I would never underestimate the capability of any government to say one thing and do another.
    Here in the UK it seems contradictory to be pouring money into QE and simultaneously cutting back on infrastructure and services. One suspects that the "cuts" will be strictly to appease the media. I repeat, whichever political party is in power.
    My own opinion is that Western governments will try to inflate their way out of debt, this being the least socially damaging solution. They will of course be sure that they can control the inflation monster, and hold it down to a gentle 5% per year for the next ten years or so - just in time for the next banking crash.
    Maybe they can, who knows. On the whole, moderate inflation seems a better solution than widespread bankruptcies, foreclosures, unemployment, homelessness, riots and civil unrest.

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