Britain's debt confusion

The government debt and deficit have figured prominently in discussions of the UK economy over the last four years. This is in marked contrast to debate before then, when the focus was on economic growth, inflation, employment and unemployment.

The change of emphasis reflects both the large increase in the previous government’s deficits in its last two years of office and its relatively successful record in terms of economic growth, employment and inflation over the preceding 11 years. But it is not clear that the public fully grasps the economic concepts being discussed. In very simple terms, the government deficit is the difference between receipts and expenditures in a particular time period (usually a year), which deficit (positive or negative) is reflected in net borrowing. The debt is the total amount of outstanding borrowings. These measures are often presented, and most meaningfully discussed, as percentages of GDP rather than in absolute terms. This better reflects the real burdens which they impose and makes them more comparable through time and across countries.

Evidence of a lack of understanding of these concepts was provided in the early autumn by a public poll commissioned by the Centre for Policy Studies and reported in its paper A Distorted Debate: The Need for Clarity on Debt, Deficit and Coalition Aims. When asked to choose between three answers about the coalition government’s planned change in national debt, 68 per cent of those who thought they knew the answer said that the coalition was planning to reduce the national debt by around £600bn between 2010 and the end of this parliament in 2015. Just 10 per cent of those polled correctly identified that the national debt was planned to increase by around that amount over this period. Conservative supporters appeared to be the most misinformed, opting by a margin of 11 to 1 for the planned fall, rather than increase, of £600bn. This mistaken belief was also particularly prevalent amongst the older age groups—those most likely to vote at elections.

The authors of the CPS paper attributed these mistaken beliefs to widespread confusion between “deficit” and “debt” since politicians of all parties and the media have frequently muddled the two concepts. In particular Conservative politicians before the election, and Coalition spokespersons subsequently, have referred to the deficits more frequently than the debt. This is probably because the deficit had risen rapidly in the two years prior to the election and has subsequently fallen (at least until the current fiscal year), whereas the debt has risen throughout both these periods. Prior to the Conservative party conference, the prime minister correctly said that, under the coalition, the deficit had fallen by a quarter—but without adding that the debt had risen by a quarter.

This confusion is probably also reflected in mistaken beliefs about the changes in the debt and deficit prior to, and since, the 2010 general election. In Prospect, Norman Tebbit wrote of "the scale of the debts piled up by New Labour [being] so far outside normal experience." In fact, during Labour’s first five years in power there was, on average, a surplus (of 0.8 per cent of GDP). Although there were then deficits of around 3 per cent of GDP in the period 2002/03—2007/08, the debt to GDP ratio did not attain the level inherited in May 1997 (41.9 per cent) until the end of 2008. The deficits in 2008/09 and 2009/10 were 6.9 per cent and 11.2 per cent respectively but, despite this, the average deficit to GDP ratio in the last five years of the Labour governments (5.2 per cent) was still less than that in the last five years of the preceding Conservative government (5.8 per cent).

The large increases in the deficit in 2008/09 and 2009/10 were not wholly due to higher levels of discretionary spending. The public finances were then being squeezed by the effects of the international recession on tax revenues (with the UK being particularly affected because of its large financial sector) and consequent increases in social security payments. At the time, it was also thought that demand had to be maintained in order to avoid an even deeper recession than might otherwise have occurred.

The deficit has since fallen to 9.6 per cent and 8.0 per cent in 2001/11 and 2011/12 respectively—though the figure for 2012/13 is likely to be higher than that for 2011/12. Moreover the increase in the debt to GDP ratio during the first two and a half years of the coalition government (from 53.1 per cent to 68.5 per cent, by November 2012) is now well in excess of the net increase over the whole 13 years of the previous Labour governments. Those in the coalition who refer so frequently to the inherited “mess” might care to reflect on these comparisons.