EREP 2 Debt & deficits basics - Prime Economics
Jeremy
Smith,
23
February
2015
BRIEFING
3
Public
debt
and
deficits
?
back
to
basics!
Jeremy
Smith,
Policy
Research
in
Macroeconomics
This
is
a
briefing
from
Economists
for
Rational
Economic
Policies.
These
address
major
current
issues
affecting
the
UK
economy,
in
particular
those
associated
with
counterproductive
"austerity"
policies.
1
Jeremy
Smith,
23
February
2015
Introduction
This
is
the
second
of
two
linked
briefings
on
the
theme
of
austerity,
deficits
and
debt.
This
one
looks
in
a
little
more
detail
at
the
definitions
and
misconceptions
around
public
debt
and
deficits.
Public
Debt
Public
debt
(most
but
not
all
of
which
is
central
government
debt)
is
a
stock
that
has
cumulated
over
time.
It
is
measured
in
two
ways:
(a) As
a
sum
measured
in
?s,
(b) As
a
percentage
of
Gross
Domestic
Product.
Within
the
UK,
it
is
generally
net
debt
that
is
measured,
but
for
purposes
of
EU
law
and
accountancy
(the
Maastricht
criteria,
which
are
not
enforceable
on
the
UK),
it
is
gross
government
debt
that
is
published.
Gross
debt
means
the
total
stock
of
debt
owed;
net
debt
is
the
total
debt
minus
the
financial
assets
of
government
(e.g.
interest
payments
due
to
government).
UK
net
debt
is
at
present
some
10%
less
than
gross
debt.
In
May
2010,
when
the
Coalition
Government
took
office,
net
public
debt
(excluding
public
sector
banks)
was
?974
billion.
In
December
2014,
it
had
risen
to
?1483
billion.
As
a
%
of
GDP,
in
May
2010
it
was
62.7%,
and
by
December
2014,
it
had
risen
to
80.9%.
It
is
worth
noting
that,
until
the
global
financial
crisis
hit,
the
Labour
Government
had
overseen
a
level
of
public
debt
that
(as
a
%
of
GDP)
was
low
by
historical
standards,
as
this
chart
(1945
to
2014)
shows:
2
Jeremy
Smith,
23
February
2015
In
1997/8
public
debt
was
39.3%
of
GDP,
in
2001/2
it
had
fallen
to
29.3%.
By
2007/8,
it
was
36.7%.
What
caused
it
to
rise
was
the
shock
of
the
global
financial
crisis
from
2008,
and
its
economic
aftermath.
It
should
also
be
recalled
that
the
debt
figure
includes
borrowing
for
essential
long--term
investment
(capital)
purposes,
e.g.
on
schools,
hospitals
etc.
The
OBR
(December
2014)
forecast
was
that
central
government
total
expenditure
in
2014/15
will
be
?704
billion,
of
which
interest
on
the
stock
of
debt
is
estimated
at
?48
billion
(around
6.7%
of
government
spending).
The
interest
payable
on
the
central
government
debt
stock
rose
in
cash
terms
from
?33
billion
in
2009/10
to
?47
billion
in
2010/11
(the
year
the
Coalition
government
took
office).
In
real
terms
(i.e.
after
allowing
for
inflation,
and
at
2013/4
prices),
central
government
debt
interest
was
?47
billion
in
2010/11
and
again
?47
billion
in
2013/14,
according
to
the
Public
Expenditure
Statistical
Analyses
2014.
Despite
higher
debt,
after
an
initial
sharp
rise
in
the
wake
of
the
global
crisis,
annual
interest
payments
have
not
risen
significantly
in
real
terms
since
2010/11.
Moreover,
as
a
percentage
of
GDP,
UK
interest
charges
on
its
debt
have
not
risen
significantly,
in
historical
terms.
European
Commission
statistics
tell
us
that
in
1995,
during
John
Major's
government,
interest
payments
were
3.5%
of
GDP.
Under
the
Labour
government,
the
ratio
had
fallen
to
just
2%
of
GDP
before
the
crisis,
and
it
has
since
risen
to
just
3%
of
GDP
in
2012
and
2013.
So
despite
the
crisis,
the
ratio
of
UK
interest
payments
to
GDP
is
still
today
lower
than
that
achieved
and
bequeathed
by
the
last
Conservative
government
after
18
years
in
office!
Therefore,
the
increase
in
public
debt
caused
by
the
global
financial
crisis
has
not
made
that
debt
significantly
more
expensive
for
government
or
tax--payer
in
real
terms,
or
as
a
share
of
the
national
"cake".
One
reason
is
that
the
Bank
of
England
agreed
in
2012
to
pay
Government
interest
earned
on
its
holding
of
?375
billion
Government
debt
purchased
under
the
"quantitative
easing"
(QE)
programme.
Between
April
to
January
in
2013/14,
?31.1
billion
was
transferred
from
the
APF
to
central
government.
By
contrast,
only
?10.7
billion
was
transferred
in
the
same
period
in
2014/15.
3
Jeremy
Smith,
23
February
2015
The
Public
Budget
Deficit
The
public
budget
deficit
?
which
is
mainly
the
central
government
deficit
?
represents
the
difference
between
government
income
(revenue)
and
government
expenditure.
It
can
be
measured
at
the
end
of
(usually)
a
monthly
or
annual
period,
and
fluctuates
according
to
the
precise
relative
movements
of
income
and
expenditure.
Because
the
deficit
(like
the
fluctuating
day--to--day
level
of
your
overdraft)
is
a
shifting
flow
of
funds
in
and
out,
government
cannot
just
decide
to
"pay
down"
or
"pay
off"
a
deficit
(as
some
leading
politicians
still
mistakenly
suggest).
This
is
because
the
deficit
is
not
a
given
stock
of
debt
(like
e.g.
your
mortgage
principal).
It
is
dependent
on
constant
movements
in
the
income/expenditure
relationship,
not
all
of
which
by
far
are
in
government's
power
to
control
As
with
debt,
the
deficit
can
be
measured
in
two
ways:
(a) In
absolute
terms,
i.e.
as
the
nominal
(cash)
amount
in
?s
--
as
a
snapshot
at
a
given
time
(b) Or
it
can
be
calculated
as
a
share
of
the
British
economic
`cake'
as
a
whole,
i.e.
as
a
percentage
of
GDP
Recent
Conservative
Party
posters
have
mixed
these
two
up
in
a
way
designed
to
confuse
voters.
The
posters
claim
that
"the
deficit
has
been
halved".
This
is
untrue,
since
in
cash
terms
the
deficit
is
down
by
only
one--third.
But
the
deficit
has
been
almost
halved
(to
45%)
--
as
a
percentage
of
GDP.
Not
only
that
?
but
the
deficit
remains
two
and
a
half
times
as
large
(as
a
%
of
GDP)
as
was
planned
by
the
Coalition
government
in
2010.
So
let
us
look
briefly
at
each
way
of
looking
at
the
deficit:
(a) In
cash
terms
A
deficit
can
increase
if
income
remains
stable
whilst
expenditure
rises,
or
it
can
increase
if
income
declines
while
expenditure
remains
stable.
Similarly
a
deficit
can
reduce
if
income
rises
while
expenditure
remains
stable,
or
if
income
remains
stable
and
expenditure
falls.
4
Jeremy
Smith,
23
February
2015
(b) As
a
percentage
of
GDP
As
the
economic
`cake'
(total
GDP)
expands
?
i.e.
as
employment
and
other
economic
activity
rises
?
tax
revenues
pour
into
the
Treasury
and
the
deficit
(if
unchanged
in
cash
terms)
falls
as
a
share
of
economic
output.
Equally,
as
the
economic
`cake'
contracts
(or
is
deliberately
contracted
by
`austerity')
so
tax
revenues
contract,
and
the
budget
deficit
(if
unchanged
in
cash
terms)
rises
as
a
share
of
economic
output.
To
reduce
the
deficit,
therefore,
by
contracting
economic
activity
via
austerity,
is
perverse.
It
is
to
look
through
the
wrong
end
of
the
economic
telescope.
Better
to
reduce
the
deficit
by
expanding
activity,
in
particular
decently--remunerated
employment.
"Look
after
employment,
and
the
Budget
will
look
after
itself"
--
said
John
Maynard
Keynes.
The
problem
in
the
UK
since
2010
is
that
?
even
as
overall
employment
has
increased
--
wages
have
fallen
by
a
very
large
percentage
compared
to
inflation
--
some
8%.
This
means
that
the
recent
small
annual
%
increase
in
average
pay
over
inflation
has
still
had
only
the
most
minimal
impact
on
this
overall
fall
in
real
pay.
This
decline
in
wages
has
had
a
substantial
negative
impact
on
government
revenues
via
reduced
taxes
etc.
So
we
need
not
only
full
employment,
but
better--paid
employment
for
working
people
as
a
whole
?
and
in
so
doing,
the
deficit
will
reduce
of
its
own
accord
without
major
further
spending
cuts.
This
emerges
from
the
recent
report
of
the
Institute
of
Fiscal
Studies
(Green
Budget,
February
2015):
Public
sector
borrowing
has
not
fallen
as
quickly
over
this
parliament
as
was
expected
in
2010.
This
is
not
because
the
coalition
government
has
failed
to
implement
the
tax
increases
or
spending
cuts
that
it
announced,
nor
primarily
because
those
measures
have
raised
less
or
cut
spending
by
less
than
expected,
but
rather
because
economic
growth
has
been
lower
than
forecast,
depressing
tax
revenues.
(Our
emphasis)
5
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- basics of financial planning springboard debt counseling
- decision making in finance using credit vi d student
- financial you the basics of managing debt
- the basics of credit
- can they handle the debt
- the debt limit the congressional centerforward basics
- pawcast s2 e2 loan basics
- the debt settlement industry
- amdm 2014 final review key
- erep 2 debt deficits basics prime economics
Related searches
- 2 1 economics systems worksheet answers
- basics of economics pdf
- 2 1 economics answer key
- unit 2 exam economics quizlet
- economics chapter 2 quizlet
- economics chapter 2 economic systems pdf
- economics unit 2 exam answers
- economics test 2 quizlet
- economics unit 2 exam
- economics unit 2 practice test
- economics unit 2 test quizlet
- economics exam 2 quizlet