I have watched and read a number of different reports on the UK economy and I am getting confused by the terms debt and deficit. For a time I thought they were the same thing but I now realise that the UK’s debt and the UK’s deficit are two different things. I know the government has a target to reduce one of them but I must admit I am not quite sure which one.
I am actually quite pleased to find that the Centre for Policy Studies has produced a report which shows that there is widespread confusion between debt and deficit. This is not helped by politicians and respected senior journalists who repeatedly confuse debt and deficit. So having reassured myself that I am not the only one who is confused I thought I would do a bit of research and publish this page to explain the difference between the two terms as well as the government targets and the governments performance against the target.
|Definition||This is the total amount that the UK owes since records began
|This is the amount that is added to the UK debt in the current financial year.
|Examples of use||The UK’s debt has significant impact on the economy.||The UK is currently running a large budget deficit.|
|Notes||National debt is on old term that is no longer used because it excludes too many liabilities to be meaningful.||There is a deficit because the government is spending more than it receives in taxes. The government, therefore, borrows money which is added to the UK debt.|
|Current||The UK’s debt is currently £1.1tn (March 2013)||Jan 2013 the deficit was in the black by +£11.4bn. This is known as a surplus. The government actually received more money in taxes and other income than it paid out. So the UK debt was reduced by £11.4bn.|
|Targets||2012-13 A deficit of £120bn (which means the UK debt will increase by £120bn)
Structural deficit reduced to zero over five years
UK debt falling as a percentage of GDP by 2015-16
|Forecast||Although Jan 2013 showed a surplus the target of a deficit of £120bn in 2012-13 may or may not be achieved depending on which forecast you read !
George Osborne confirmed in the Autumn Statement 2012 that the target of debt falling as a % of GDP has slipped to 2016-17.
Structural deficit is a long term deficit that the government has planned for in order to maintain living standards and supply services to citizens.
The government sometimes seems to indicate that it wants to “pay off the governments credit card”. This implies reducing the UK debt to zero.
- This is not achievable (the UK debt is over £1 trillion) what politicians actually mean is that they want to reduce the deficit to zero i.e. they do not want to add to the UK debt
The government borrows money by selling gilts. Gilts are seen as a relatively safe haven because they are backed by the government and are typically bought by insurance companies and pension funds.
The UK is not the only country with debt problems. A few examples are listed below with debt expressed as a % of GDP in order to be able to compare countries:
|Country||Public Debt as % of GDP|
Source Wikipedia which quotes CIA World Factbook and Eurostat as sources
The UK does not have the worst debt problem. However, it is a problem that the government needs to resolve but it will not be resolved quickly !