Beneath all the euphoria of the UK’s new Coalition, serious doubts lurk both about its longevity and about its economic policies. Despite all the mood music, the reality is that the determination to tackle the UK’s vast public sector deficit – of £163 billion – has been materially diluted. After all, a Conservative Government - with a decent majority - would have been able to address this issue with Thatcherlike zeal.
To date, the UK has managed to avoid serious problems in funding such a massive deficit. But the financial risks remain high. After all, economic growth of just 1% per year until 2014/15 – and a lacklustre effort to cut public expenditure – would push the UK’s PSND/GDP ratio to c.100%. Such a figure is widely regarded as being very dangerous. Remember, too, that even during the 1979-90 Thatcher years, there were actually modest real increases in public expenditure, despite her herculean efforts to cut it.
A second casualty may be new nuclear-build. The Coalition appears to ‘agree to disagree’ on this issue – some Liberal Democrats have passionate anti-nuclear views. Even if the Labour Party continues to back new nuclear-build, potential investors may be frightened off. In any event, the two most likely investors – France’s EDF and Germany’s E.On – are both running very high financial deficits and are actually seeking to sell assets rather than undertake additional investment. Interestingly, there have been recent suggestions that, despite EU legislation, the life of some of the UK’s coal-fired plants may be extended to bridge the generation shortfall which will arise within a few years.
Finally, the planned third runway at Heathrow is an obvious Coalition casualty. In fact, other airport projects, including one at Lisbon, are now being deferred on costs grounds as economic reality kicks into the EU.
As Harold Wilson said ‘a week is a long time in politics’. Vindicated again?