DAVID Cameron and Barack Obama have reaffirmed the special relationship between Britain and America this week. But let us be clear that one of the issues on which our countries must be united is the strategic importance of US debt – and the need across the Western world to live within our means.
What happens in the US, still the world’s largest economy by far, and how it handles its debt crisis will have far-reaching implications for us all.
Naturally, we in the UK are focused more acutely on our own debt and the financial challenges in the City that have propelled the issue of bankers’ bonuses to the forefront of debate. We are compelled to pay attention to the burgeoning fiscal instability in Europe, and ongoing financial bailouts. But arguably one of the greatest strategic threats to Britain, and indeed the world economy, is the consequence of US debt creeping up to and beyond critical levels. What is frightening is that many voters, and more worryingly politicians, do not seem to appreciate the severity of the situation at hand.
Debt is a national security issue. Economic wellbeing is the wellspring of global influence and the means by which we can afford our military capabilities.
Given the financial situation left by the last Labour government, the UK has had no other choice but to reduce defence spending as part of its deficit elimination strategy. More recently, the US has embarked on spending cuts to its defence programme totalling $487bn over a decade – yet the deficit will remain and debt will continue to rise inexorably.
History provides context to the current situation. By the end of WWII, US debt reached its highest level in relation to GDP in the country’s history, peaking at 121 per cent of GDP in 1946.
Rapid, stable economic growth during the 1950s and 60s meant that, despite the escalation of the Vietnam War, the space race and public works projects, debt had fallen to 33 per cent of GDP by 1975.
By 1993, a combination of Reagan-era tax cuts, Cold War defence spending, the Gulf War and the recession of the early 1990s had generated deficits that pushed debt to a 40-year high of 72 per cent of GDP.
Surpluses during the early Clinton years, partly thanks to reduced military spending after the Cold War and to increased tax revenues during the dot-com bubble, brought debt down to a 15-year low of 55 per cent of GDP by 2001.
Yet by early 2009 it was around 80 per cent. Based on the 2010 US budget, it was estimated that total national debt would almost double in dollar terms between 2008 and 2015 and grow to nearly 100 per cent of GDP. However, some sources maintain that the 100 per cent ratio was reached in the third quarter of 2011 and that this has risen to 115 per cent today.
To reach anywhere near that debt level in the twenty-first century, when it was last encountered as a result of twentieth-century total war, is something that should send alarm bells ringing everywhere. Dealing with such a vast debt is something that needs immediate attention.
We also need to bear in mind that such high debt levels are juxtaposed against the expansion of emerging economies, including China and India. The IMF forecasts 2012 GDP growth at 8.2 per cent, 7 per cent and 3 per cent for China, India and Brazil respectively, compared with 0.6 per cent for the UK and 1.8 per cent for the US. Not only this, but on IMF forecasts for purchasing power parity (PPP), China, which was ranked as the second-largest economy in 2009, would go from less than two thirds the size of the US in 2009 to over 90 per cent in 2015, if projections become reality. Furthermore, China’s debt as a percentage of GDP is near a sixth that of the US.
Friends and allies, especially in Asia, are asking if America is still a basket in which it is wise to put all their eggs or whether China is a better long-term bet. Many wonder whether the American political class will have the courage to push through the necessary austerity measures to ensure the country ends the decade with its economic primacy intact.
A financial meltdown in the United States will have a huge effect not only on Asia but on Britain and Europe, as it will shape both the global economic pattern and, for Britain, the perceived strategic importance of our most important ally.
You cannot be strong if you’re broke. As America’s trusted friend, it is our duty to warn the US to bite the bullet on debt. Its pre-eminence is at stake.
Liam Fox is the Conservative member of parliament for North Somerset.