A tale of deficit and the debt - the facts
Politicians won't stop talking about "balancing the books" - but not all of them seem to be quite sure how to do it, or indeed, what books they're supposed to be balancing. We've given them a hand.
Public Sector Net Borrowing (PSNB) is the official term for “the deficit”. It is the total that the government must borrow on top of tax receipts and other government revenues in order to pay for the functions of the public sector.
This figure is projected to be £91 billion for 2014/15 or 5 per cent of UK Gross Domestic Product (GDP).
- In 2009/10 the deficit was £153 billion (10.2 per cent of GDP). In the last five years we have seen a fall in PSNB of about 40 per cent - it has not been halved as per the Conservative Party’s claim.
- This is only true of PSNB as a percentage of GDP (from 10.2 per cent to 5.0 per cent).
- Furthermore the Office for Budget Responsibility forecasts that tax revenues will only exceed public sector spending (by £4 billion) in 2018/19.
There is a great deal further to go until any government can honestly say that they have balanced the books.
Historically the deficit has been a great deal lower than it is now (although not as a percentage of GDP).
- Until 1980/81 there had never been PSNB greater than £10 billion.
- Significant surpluses have been run as recently as 2000/01 (£17.2 billion surplus equating to 1.7 per cent of GDP).
- By the time a surplus is forecast to be achieved again there will have been a 17 year period of budget deficit and public sector borrowing.
Operating the public sector without incurring massive borrowing is an achievable goal. The watershed moments appear to have been in 2001/02, the year after the last budget surplus was run, and in the years 2008/09 and 2009/10 where PSNB rose from £40.3 billion to £153 billion. It is a long road back to financial safety.
Where does this borrowed money come from?
Funds are raised by selling government bonds known as ‘gilts’ (which are considered among the safest investments in the world as they have never gone unpaid). A coupon (a biannual interest payment) is attached to the bond until the date of bond redemption at which point the bond’s nominal value is repaid in full.
- The debt interest payments for UK PSND were £48.7 billion (or 2.7 per cent of GDP) in 2013/14.
- In comparison:
- Total Corporation Tax revenues for 2013/14 were £40.3 billion,
- Fuel (£26.9 billion), tobacco (£9.6 billion), alcohol (£10.3 billion) and Air Passenger Duties (£3.0 billion) combined took £49.8 billion in 2013/14. (Autumn Statement 2014)
Debt interest payments of such magnitude hinder the chance to run a budget surplus, reduce and eventually eliminate UK net debt or to lower taxes. Every penny of debt the government takes on can be considered deferred taxation or deferred spending cuts. Government decisions taken now will affect many generations to come.
Who buys gilts? The table below breaks down the ownership of UK gilts by investor sector. Note that this is shown by market value (£'m) and not by nominal value.
This refers to Public Sector Net Debt (PSND). This is total debt issued by the public sector less its liquid financial assets. However PSND does not include the debts of state-owned banks, private finance initiative debts and public sector pension promises which would add several trillion more.
- The projected PSND for 2014/15 is £1.489 trillion or 80.4 per cent of UK GDP.
- Debt has risen from £956 billion in 2009/10 (69.7 per cent of GDP) and is expected to peak at £1.652 trillion in 2018/19 (76.2 per cent of GDP).
- PSND is forecast to fall to £1.648 trillion the following year but clearly there is no prospect of eliminating “the debt” in the short or medium term.
Like borrowing, debt has grown enormously in the recent past:
- Since the last budget surplus (in 2000/01) debt has risen from £316.4 billion to our current liability of £1.4 trillion.
- Unsurprisingly, like the deficit, the rise has been fastest since 2007/08 when debt was £559.2 billion – but in the intervening years debt has increased by £844 billion.
- As a percentage of GDP, debt was only 29.3 per cent in 2001/02
- Post-World War Two, the general trend of PSND (as a percentage of GDP) was downward until the early to mid-2000s since when it has risen unsustainably.
Given that Government’s current receipts were £622.3 billion in 2013/14 we would have to stop spending - but still collect tax revenues (and achieve operating surpluses) - for close to three years in order to eliminate the debt mountain that successive governments have saddled taxpayers and future generations of taxpayers with.
Full details of historical PSND, PSNB and Debt Interest Payments can be found here.
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4:20 PM 14, May 2018 James Price