National finances for beginners

Politicians are all vying for your vote and don’t really care if they bend the truth to get it. From a few weeks ago, here’s my simple guide to the national budget. I got a U at GCSE maths so if you spot any mistakes let me know.

DEBT refers to the amount of money owed by the UK Government, built up over many years, by many governments.

This one is easy: someone lends you a tenner and your debt is a tenner.

Net debt is the debt minus the Government’s liquid assets.

Debt has increased in recent years and is now about £1 trillion.

No politician can claim to have reduced debt.

Debt was £811bn around the time the Tories/Lib Dems took over. In December it was £1,111bn.

THE DEFICIT is the difference between the Government’s expenses and its revenues — what it spends and what it gets.

For example: if you borrow £10 a week to meet a shortfall in your income for a month, your debt is £40 and so is your monthly deficit.

The next month your deficit is still £40 but your debt is now £80 (two months at £40).

If you only borrow £20 the next month, you’ve halved your deficit (£40 to £20) but your debt still goes up by £20, to £100. Politicians can thus claim to have halved improved things by reducing the deficit, masking the fact that debts are rising.

It could have been much better: between 1998 and 2001, under Tony Blair, the country had four years of surplus, but Labour just increased the debt.

If Labour claims to have reduced the deficit or run a surplus it won’t mention this.

The Tories (and the next government) are hamstrung because the average growth of public spending is about 3%, and much of this is automatic — rising pensions, for example.

GDP. Debt can also be expressed as a percentage of total economic output, or GDP (“gross domestic product”).

The debt looks better if national productivity is on the increase: if you borrow £50 off a friend and your household has £200 coming in, you’re less financially robust than next door, if they owe £50 but have £400 coming in.

STRUCTURAL deficit is where simple comparisons break down. This is the budget deficit (income v outgoings), adjusted to account for the cyclical nature of the economy. The deficit automatically falls when the economy grows, so the structural deficit excludes the effect of this. It’s the deficit that’s not affected by economic performance.

It’s this more complicated (easier to fiddle, I’d suggest) figure that George Osborne promised to eliminate by 2015-16.

He failed, hence the Tories’ attempts at making up stats to claim some kind of success.

The Government has reduced the structural deficit but not as much as they promised.

Because of this, the Tories are now trying to say they’ve reduced spending as a percentage GDP but this is also untrue.

The debt, £811bn at the 2010 election, was 55.3% of GDP while December’s £1,111bn was 70.7% of GDP.

The national debt is forecast to hit 74.7% of GDP this year and peak at 79.9% in 2015-16, before falling slightly by 2016-17.

At which point whoever is in power will claim the credit.

The UK’s 77% of GDP should also be compared to Japan’s 225%, Italy’s 120% and the US’s 75%.

In the late 1940s, UK debt was over 180% of GDP, and around that time we set up the welfare state and NHS.

Mr Cameron was of course criticised for saying the cuts had not reduced economic growth, when the Office for Budget Responsibility says it has.

From 2002–2007, Labour increased national debt to 37% of GDP (37%!), because it increased spending on health and education (the social security budget also rose).

Whether borrowing to spend on schools and hospitals is good or bad is another debate, but Labour increased the debt.

INVESTMENT BORROWING: it’s also worth knowing that borrowing is both borrowing to fill a revenue deficit and borrowing for investment.

This is like you borrowing £20,000, £5,000 to clear a credit card debt you ran up while out of work (debt) and £15,000 for a house extension (investment, but still a debt).

There IS a difference between the parties here: in 2007, Labour borrowed £37.7bn, of which £28.3bn was investment. In 2013, the Conservative-led coalition borrowed £91.5bn, but only £23.7bn was invested, so the Tories can claim to have cut something, even though this is public sector investment.

As a percentage of GDP, public sector investment has shrunk from 3.5% to 1.5% under the Tories.

As is moderately clear above, a booming economy reduces the deficit (or even creates a surplus) making repayment of debt easier.

Unfortunately politicians of all hues believed the bankers’ claims that it would ever be thus (“No more boom and bust” and all that tosh) and Labour was happy to increase debt while in budget surplus.

After 2008, debt increased sharply because of the recession (lower tax receipts, higher spending on unemployment benefits). This also exposed a structural deficit, caused by excessive spending.

There was also the minor matter of Northern Rock, RBS, Lloyds…

I think I’ve got this right but I’m not the only ones to find it complex: last year David Cameron was told off for saying the Tories were “paying down Britain’s debts” when he meant deficit, the same mistake the-then Moorlands MP made in a letter to the Chronicle a couple of months ago.

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