I cut my teeth in financial services in the early '70s, which means that I was weaned on a diet of inflation, recessions and rising unemployment.
During that period, inadequate, inappropriate fiscal policy led to the world's fourth biggest economy going cap in hand to the IMF and suffering the ignominy of being told that any borrowing facility will be subject to cuts in public spending.
UK public sector net debt, as a percentage of GDP, reached a peak of 53.8% (75/76) in this period.
Once overseas, and UK investors, lose confidence in a country, its bond market is punished and in 1972, 1973 and 1974 UK gilts fell by -12.3%, -18.6% and -27.5% respectively. Over these three years, gilt prices declined by a total of 48% in notional terms and by 63% in real terms.
Despite protestations of prudence, and a workable "golden rule", the public finances have deteriorated rapidly. Public sector borrowing has risen from 30.3% of GDP in 2001/02 to 36.6% in 2006/07. And this is during the good times.
During the bad times (now), borrowing is set to explode and the Treasury forecasts that borrowing will continue to rise until 2016 when it will decline from a peak of over 57% of GDP - higher than the peak during the awful conditions of the 1970s.
And that is what is counted, you need to remember that this government has managed to raise capital off balance sheet (and we all know what happened to the banks when they did the same).
The ability of governments to raise money in the bond market is dependent on investors (lenders) having confidence in the authorities' determination to balance public finances, ability to pay interest and re-pay capital, and willingness to control inflation. Let me ask you a simple question, which regional government do you trust the most: Europe, USA, Japan or UK? If you put UK last, I suggest you avoid gilts.
Gary Reynolds is director and chief investment officer at Courtiers
The views expressed in this article are those of its author and do not necessarily represent those of the company he represents, IFAonline or any other Incisive Media affiliated organisation.IFAonline
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