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UK BREAKING DEBT RULE 2012


To: The Right Honourable British Chancellor George Gideon Oliver Osborne MP.

From: Athinarayanan Sanjeevraja

Date: September 28, 2012

RE: Breaking Debt Rule

Suggestion: 

Good Morning Mr. Chancellor. Indeed, I was crushed to hear Bank of England Governor Dr. Mervyn King comments on breaking debt rule. Dr. Mervyn King gave permission to break one of your iron-cast promises. I am not faulting Dr. Mervyn King comments. Indeed, Dr. Mervyn King has done a pretty admirable job handling financial crisis in 2008.

Mr. Chancellor I am sorry to say that your government was elected to diminish the long term structural deficit. But your government failed to achieve it. UK keeps it top AAA credit rating because market expects that your government would keep the budget tight. But your government failed to keep the budget tight. If you lost AAA credit rating, interest rates will shoot up and UK will never be able to diminish its deficit. Indeed, UK GDP is shrinking. Therefore there will be less tax revenues to reduce fiscal deficit. But I don’t see any attempts by your government to diminish the fiscal deficit during 2012. UK adopted austerity plans in the past two years to limit government spending and keep borrowing rates very low but the UK economic recovery remains challenge due to weak global economy and banking troubles across major developed economies. Your government is not executing effective fiscal consolidation programme which should not restrain economic growth.

Mr. Chancellor, if I am not mistaken, UK real terms public expenditure is still increasing. You waste tens of billions on overseas aid and EU medical aid. If you could have cut it fraction, then you could have achieved your fiscal target. Private sector deleveraging leads to renewed economic growth. But deleveraging taking place in UK is very slow compare to United States and Australia. UK debt to GDP ratio is continuously rising. If I am not mistaken, UK the financial sector accounts for the largest share of debt and UK household debt is also increased since 2008. UK has to reduce the debt without overly restraining economic growth. It is not an impossible process. It is quite possible. Your government need to find the right balance between debt reductions and stimulate economic growth. I think your government should encourage more investment in nonfinancial businesses and restructure your banking sectors to enhance the private sector deleveraging. This would get back your economy on sustainable path.

Mr. Chancellor, your government had set up the Independent Commission on Banking (ICB) chaired by Sir John Vickers, to look at the reform of the banking industry to separate retail and investment banking functions. It was most controversial recommendation because the financial crises 2008 were a failure of regulators than regulation. Germany still continued on universal bank path despite severe banking crises. Mr. Chancellor, if you were failed to restructure banking sector, you cannot revive your economy Mr. Chancellor.

I am Athinarayanan Sanjeevraja with great respect of you Chancellor.


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