Wednesday, 2 February 2011

Debt vs Deficit

George Osborne 'might fail to pay off deficit by election' is a headline on the Independent's website today.  It is headlines like this that help fuel the misunderstanding/confusion around the nations finances.

The deficit is not something we can "pay off", it is the difference between the Government's Spending and it's Income.  At the start of each fiscal year the deficit is £0, this then grows as the year unfolds and the Government spends more than the receipts they collect.  This is what George wants to eliminate before the next election - i.e. to stop spending more than they earn.   Conventional economic theory suggests that it is

The National Debt however is the amount of money the UK actually owes.  This amount is increasing ever year due to the fact that the Government is running a budget deficit.  At time of writing the national debt currently stands at over £900,000,000,000 - not including the recent (necessary) bailout of the banks.  This towers over the 2009/10 budget deficit of £170.8bn and shows why urgent action is needed.  The interest on this debt is over £40 billion a year, which apparently works out to £1,882 per household.

It is for this reason why the media and people like Ed Balls are completely wrong when they suggest we should be delaying reducing the deficit.  Every £1 we spend on interest is not money being spent on schools, hospitals and other services we rely on.  Every £1 we borrow is effectively £1 we have borrowed from future generations that they will have to pay back with interest.  Yes the next few years will be tough, but unless we can at least start to bring down this figure by running a budget surplus we are just putting off the pain until further down the line when it will be a lot lot worse.

George Osbourne will not "pay off" the DEFICIT, as that is not something to pay off, the plan should be that come 2015 we are in a position where we are starting to pay off our DEBT.

1 comment:

  1. Nick Clegg doesn't help with this either, he mentioned the phrase twice in his recent speech on "Building a new economy".