The U.K. comes a cropper

by Andrew Sprung

Martin Wolf notes that while the U.K.'s GDP shrinkage in the crash was relatively modest (4.7% up to the third quarter of 2009), the hit to government revenue was disproportionately huge, mainly because corporate tax receipts fell 26% from Oct. '08–Oct. '09. VAT receipts dropped 17% in the same period.

The reason? The U.K. has become a "monocrop" economy, overly dependent on its financial sector, which accounted for a quarter of corporate tax revenue. That made the country akin to those that rely disproportionately on revenues from natural resources:

Countries that depend heavily on output and exports of commodities whose markets are volatile are all too familiar with the cycles these can create. In booms, export revenues and government revenues are buoyant, the real exchange rate appreciates and marginal producers of tradeable goods and services are squeezed out – a fate sometimes known as the “Dutch disease” after the impact of discoveries of natural gas on the economy of the Netherlands. Often, both government and the private sector borrow heavily in these good times. Then comes the crash: exports and government revenues collapse, fiscal deficits explode, the exchange rate falls and, quite often, inflation surges and the government defaults.

Strange to think that overreliance on producing financial gas — e.g., derivatives of derivatives of derivatives — can unbalance an economy as surely as overreliance on natural gas.

Wolf, by the way, is a winner of the Wolf Munch Rock award — so named because the truth is hard to swallow.