At first glance, not a lot was going on last Tuesday. Priti Patel was desperately trying to hang onto her job, unsuccessfully as it turned out. Donald Trump was mouthing off on a trip to South Korea. Manchester City were rumoured to bidding for an incredibly expensive footballer, and somebody somewhere was inevitably moaning on about Brexit. It was all fairly run-of-the-mill stuff.
But for number-crunchers, something interesting happened. It was the day when France ran out of money. As of Nov. 7, all the money the government raises through its taxes – and this being France, there are literally dozens of them – had been spent. The rest of the year is financed completely on tick.
And yet France is far from alone. All the main European countries, the UK included, are running out of tax revenue well before the year is over. That is worrying for three reasons. It is reminder that spending is still way too high. It tells us that governments have failed to curb deficits. And it is a warning that next time there is a recession governments won’t have any room to respond with a fiscal boost.
There are lots of dry ways of pointing out that governments are spending a lot more money than they raise in tax revenue. Economists and statisticians wheel out debt to GDP ratios and chancellors and finance ministers set targets for deficit reduction. Those, however, usually come in hard-to-follow percentages, or else the billions and billions involved pile up so quickly that most of us simply glaze over. But in France, the Institut Molinari has come up with a very neat way of illustrating the issue in simple terms. It works out the moment in the calendar after which everything the government does has to be financed through borrowing. If you wanted to, you could call it the day the money runs out.
So how’s that going? France, perhaps not very surprisingly, turns out to be the country that is out of cash first. A government which last managed to balance the books in 1980 used up all its money with 55 days of the year still left. That was a day earlier than the year before, and four days earlier than back in 2014. France is not only living beyond its means, but it is now doing so at an accelerating pace. And that was despite the fact that taxes and social security charges have gone up. Once those charges are combined, the state is raking in 53 per cent of GDP in revenues – its problem is that it then spends an even more massive 56 per cent of GDP over the same period.
But it was far from alone. Spain ran out of money on Saturday. Over in Romania, the bank account was empty as of yesterday. Next week, Poland will be out of cash, followed by Italy, which will be officially skint on Nov 26. In the UK, our politicians will have officially spent all the income tax, corporation tax, VAT, fuel duty they take from us by Dec 7.
Across Europe as a whole, central governments will be out of money on Dec 6. Only four EU countries manage to make it through Christmas and into the new year still in the black. They are Cyprus, Malta, Germany, and a surprisingly thrifty Sweden, which gets all the way to Jan 20. They are the exception, however. The norm is now for spending to be way ahead of the money collected in taxes.
That is not always a problem, of course. Very few people would argue that we should go back to the days before Keynes where any kind of deficit in even the most dire of circumstances was regarded a sign that the world was about to end. In a recession, it makes sense for governments to borrow a bit more, and get businesses moving again and people back into work. Nor is there necessarily anything wrong with government borrowing to invest, although a lot of what it “invests” in may not necessarily have the returns that are promised.
But there is a difference between that and huge and persistent deficits. The European economy, helped along by a couple of trillion euros of printed money, is doing OK this year. The EU as a whole is forecast to expand by 2.3 per cent, the fastest pace in a decade. The deficits are not an emergency response to a sudden downturn. They are built into the system. That is worrying – for three reasons.
First, across Europe, governments are living way beyond their means. Those deficits are not coping with a sudden emergency, and they are not paying for investment that will help them grow faster in the future. The most persistent deficits are in social security schemes (and many would be even worse if pension liabilities were properly accounted for). Is that sustainable indefinitely? It takes heroic faith in finance ministries and central banks to believe it is.
Next, even though economies have mostly recovered from the crash, the deficits are still piling up, with no plan for paying them back. If you look at debt-to-GDP ratios, they are spiralling out of control as well. For the EU as a whole, the ratio stands at 89 per cent. Greece is on an alarming 176 per cent of GDP, while Italy is on 137 per cent and France and Spain are just a fraction under 100 per cent. When are they going to start to be reduced? Right now, the answer is simple. Never.
Finally, governments have run out of room for any kind of fiscal boost when there is another recession. The economy will inevitably turn down at some point, and there could be a major crash. When it happens, you’d hope the government could respond with increased spending. But it can’t do that if it is already locked into permanent deficits.
From now until the end of this year, most of Europe will be living on tick. Sure, that is sustainable right now. The markets are benign, and the European Central Bank is still buying government bonds by the cartload. But sooner or later, that debt will catch up with them – and that means Nov. 7 was a far more significant milestone than it may have appeared on the day.