Britain’s Debt Problem – Does it really matter?

In the year 2008/2009 the country’s net debt – Britain’s Debt Problem – totalled £626.6 billion.  By the end of  2013 that net debt figure had risen to £1.254 trillion.  Today our Net Debt figure stands at £1.334 trillion …. and increases at the rate of £5,170 a second!

Expressed in terms of GDP, the country’s net debt position has deteriorated over this 6 year period from 44.2% to 75.7% – and it worsens by the day.

Before I go on, let’s just define what we mean by ‘debt’ and what we mean by ‘deficit’. There is a difference, and it has the capacity to confuse.

  • ‘Debt’ is pretty easy to grasp, well at least ‘net debt’ is.  Net debt is the sum total of outstanding Government borrowings, net of the value of the Government’s liquid assets, and this is the figure of £1.334 trillion as mentioned above.  Net debt doesn’t include huge ‘off balance sheet’ liabilities – the contracted future expenditure of (say) unfunded public sector pension liabilities …. or the projected cost of HS2!
  • ‘Deficit’ is a current budget figure, being the difference between the Government’s day to day expenditure and its day to day received income.  This year, the Budget Deficit is likely to be around £110 billion.

Now the critical question that has to be asked about all of this is “does it really matter?”

In his December Autumn Statement, the Chancellor claimed that he would achieve a ‘balanced budget’ in 2018/2019 – four years later then he claimed in 2010 and more than three years after the next General Election.  The Chancellor’s forecast future borrowings over the next 4 years will deepen our indebtedness, push our borrowings / GDP ratio closer to 100% and increase our dependency upon our creditors.

The country’s annual debt interest bill, currently just short of £50 billion, is projected to rise to over £75 billion over the next 4 years and that figure assumes no increase in our borrowing costs.

But, again, does it really matter?  Big figures easily baffle brains – so let’s convert these huge sums to bite-size pieces.  Think of it like this:

  • Every living soul in the UK (and there’s 63.5 million of us) is now accountable for £19,000 of the country’s borrowings.  Each one of us incurred debt interest on these monies, of £743 last year.  And every month for the next 5 years these figures will get bigger.
  • To assist and support our continuing ‘credit worthiness’, our annual debt interest must be paid – and the borrowed capital (eventually) repaid.  Setting aside the capital repayment problem, it’s instructive to recognise that £50 billion of debt interest is equivalent to 1/3rd of the Government’s receipts from Income Tax …. or ½ of its receipts from VAT …. or about 1½ x its receipts from Fuel Duty.  So, if we think of our debt interest bill in terms of personal taxation – or personal expenditure, then the answer to “does it really matter?” is easier to find!
  • To complete the picture, we need to think of who finances the Government’s debt – in essence, who buys the gilts?  Well, overseas investors hold about 1/3rd of UK gilts, another 25% is held by the Bank of England and pretty well all the rest by our banks, insurance companies, pension funds and general public.  So, whilst we may all feel very sore indeed about the dismal financial yield on our fixed interest holdings, there’s comfort (albeit cold comfort) to be had from the corresponding cost of the interest we pay … on the borrowings that are incurred for us, by the Government, in our name.  For a 1.00% rise in gilt yields would add more than 10% to our annual debt servicing costs …. How cruel is that?

Finally, let’s nail down the muddle over ‘debt’ and deficit’, because as mentioned above, it has the capacity to confuse – either by baffling big brains or through the deliberate employment of ‘spin’.  Why even the Chancellor and the PM seem to share this confusion, when the PM claimed in a Party Political broadcast last year, that the coalition was “paying down Britain’s debt”, which it clearly wasn’t, and the Chancellor claimed last month that “the deficit has fallen by a third since 2010” – which it clearly hasn’t!

Please feel free to comment on this BLOG. We would love to hear from you.

Geoff Stait – 10th March 2014

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