As explained this week by Spectator Editor Fraser Nelson, most Britons confuse the concepts of deficit and debt and politicians and the media don’t help to resolve the confusion.
To put it simply, the deficit is the amount that the British government borrows every year to balance the budget. This amount has fallen slightly as a percentage of GDP.
But the debt is the total amount the government owes and this amount is rising steadily and will rise a further £600 billion by 2015.
So the fact is that despite all the coalition government’s austerity measures our deficit is rising at such a rate that Britain will have the worst deficit in the Western world by 2015 (see chart). And this means that our national debt is getting bigger, bigger and bigger every year.
As Nelson says, ‘The word “deficit” is to blame. It’s a wonk word, that normal people don’t use – at home or at work. If most people had to guess, they’d say “deficit” is another term for “government debt.” When MPs say “we’re cutting the deficit,” most people hear “we’re cutting the debt.”’
But this is not so at all.
Nelson adds, ‘In America, broadcasters tend to use more straightforward vocabulary like “balance the books” and “stem the rise in debt.”’
One wonders if the use of this confusing language is not just incompetence in communication but rather a deliberate ploy to pull the wool over the eyes of British voters and tax payers.
Anyway here’s the poll, sample 2,002 adults… showing that only 6% got the right answer. This you tube video explains it graphically clearly and simply. It should be compulsory viewing.
Which of these statements do you believe to be the most accurate?
49% - The Coalition Government is planning to REDUCE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015
14% - The Coalition Government is planning NEITHER TO REDUCE NOR INCREASE the national debt between 2010 and the end of this Parliament in 2015
6% - The Coalition Government is planning to INCREASE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015
31% - Don’t know
There is a fascinating website called UK Debt Bombshell which starts as follows:
Britain owes over £1 trillion. It's real, it's ours… and we've got to pay it back. It's a truly frightening figure. Why is the world's sixth richest country so deeply in debt?
Every year the UK runs a large budget deficit. The Government spends more money than it can tax, so we plug the gap by selling bonds to investors at home and abroad. These bonds - known as gilts - have to be repaid in full, with interest. Added together, our unpaid loans make up the UK's national debt.
Right now, that debt is growing violently. The Government forecasts it will soar to an eye-watering £1.5 trillion by 2016. To put that in perspective, the UK went bust in 1976 running a budget deficit of 6% of GDP. In 2012 that deficit is going to top 8.9%.
•We owe £17,324 for every man, woman and child
•That's more than £38,086 for every person in employment
•Every household will pay £1,924 this year, just to cover the interest
The figures on the site are a little out of date but it tackles the following questions in a very straightforward way. Well worth a look.
Q: Why is Britain in so much debt?
Q: Who do we borrow all this money from?
Q: How is national debt measured?
Q: What are we spending the money on?
Q: Does it matter how government spends the money?
Q: How will national debt affect our future?
Q: Is the problem getting better or worse?
Q: What can we do to prevent a debt crisis?
Q: Has Britain always been in so much debt?
Q: Is it right for us to borrow and spend like this?
Q: Are we really printing money?
Q: What are your sources of information?
The Good Book says, ‘The rich rule over the poor, and the borrower is slave to the lender.’ (Proverbs 22:7). It also says, ‘The wicked borrow and do not repay, but the righteous give generously’ (Psalm 37:20-22).
How are we personally responding?
As a Christian economist, I'll try and respond and not be trite.
ReplyDeleteDebt is a problem if we can't pay it back any more - and deficits are a problem if banks won't fund them. As banks will fund them, and at pretty low rates, then that says that things aren't as bad as the debt bombshell website (a scaremongering one if ever I came across it) would like us to think.
Governments have one large advantage over the rest of us when it comes to taking on debt, namely they can print money to finance it, one way or another. In our day and age where parliaments legislate against that happening directly, instead a bit of higher inflation here and there will reduce the size of that debt.
It's worth also pointing out that the graphic contained forecasts, and the good Lord created economic forecasters to make the weather forecasters look good, as the old adage goes. And the OBR is continually revising its forecasts. While our deficit isn't small, it isn't at panic stations just yet.
Furthermore, I'd argue that graphic's a little misleading, put out by those who want the UK to balance the books at all times. Better would be to have a picture of the debt-to-GDP ratio, where you'd find the UK actually looking pretty damn rosy - way behind the US, Japan and all the usual suspects.
The bottom line is, economic jargon aside (we are culpable I'm sure), government will not run balanced budgets throughout the economic cycle if they collect taxes that are dependent on economic activity (VAT, income tax, corporation tax etc), and if they pay benefits similarly (unemployment benefits). In a recession, these two factors will lead to a deficit - and the larger the recession, the larger the deficit.
I crunched some numbers a while back (happy to provide details but I wrote it in a rather infrequently used blog of mine: http://christianityeconometrics.blogspot.co.uk/2011/04/little-bit-of-looking-at-data.html), and given the sheer size of the downturn (largest since the 1930s), we should have expected a huge deterioration in public finances. That data work makes use of patterns established since 1980, hence over a lot of Conservative and Labour governments, and says that actually, given the size of the downturn it should have been much larger than even Labour ran.
The flip side is, of course, once the economy recovers, public finances start to look much better since tax receipts rise and unemployment falls. The strange thing about this "recovery" is that austerity has almost single handedly choked off the recovery, meaning that public finances can't improve, and in fact have got worse - as Osborne has finally begun admitting recently.
Of course, the biggest problem we all have is knowing who to believe and who to trust when we hear them talking about the economy, but it's pretty similar to working out who to believe when they are talking about the Bible and Christianity - you have to use judgement. Both are expounding something very much misunderstood to the general population, full of odd sounding complicated terms - and they have at their core things that at first glance make precisely no sense - like the idea that austerity has made govt finances worse because it stopped the economy from growing.
Thanks for this James. Some good points but I think Britain is in a very bad way indeed. Maybe not as bad as the PIGS countries but pretty woeful. Specifically:
Delete1. I don't think we should be reassured by low interest rates. These are being kept down artificially at present but will go up as Britain's credit rating worsens as it surely will.
2. We must not forget the effects of devaluation on the consumer. When I came to the UK in 1989 the NZ dollar was worth 26p. It is now 52p! The UK is deep-water diving wrt Oz/NZ etc.
3. Britain's debt/GDP ratio is actually one of the world's highest - see illustration at http://bit.ly/aNbNWu - way higher that NZ, Oz etc.
4. I'm sure we will agree that the Christian response should be simple living, generous giving and getting out of debt. I though Cranmer's recent piece on this was very good - if you didn't see it it's at http://bit.ly/10qNgnM