I’m reviewing our economic health. Firstly by looking at our key economic indicators, which started with the National Debt, and now to look at the Budget Deficit.
What is the Budget Deficit?
The Budget Deficit, commonly referred to as the deficit, occurs when a nation spends more than it collects in taxes. Pretty simple.
Now to the more complex and contentious aspect. National economic health varies according to the business cycles. The ‘booms and busts’ in other words. Business cycles are hard to predict, as the Governor of the Bank of England said recently.
When a budget goes into deficit driven by the business cycle, caused by an economic slowdown, it’s called a cyclical deficit. Such a deficit is considered acceptable as the deficit is paid back in times of surplus. In effect it smooths out the business cycle.
However, when government budget deficits continue over the business cycles and spending is more than the long-term average of tax revenue, then this is a structural deficit. This kind of deficit indicates living beyond your means. Plainly unsustainable. I’m sure you can spot the chance for politicians to wriggle around these two types of deficit.
Right, where are we with the deficit?
Simply, in a bad way. The deficit is financed by borrowing, which is referred to as Public Sector Net Debt – PSND for short. Let’s look at the figures:
- HM Treasury June Budget Diagrams are an easy way to view the numbers
- Debt Bombshell also has the deficit numbers
- National Statistics has the latest borrowing figures
The following chart puts our humongous deficit into a longer term context.
What are the problems?
The problems resulting from having a large deficit are:
- Funding the deficit. To borrow money means finding a willing lender with money to lend. In times of international financial crisis, that’s not always a given.
- Drains wealth away from productive investment. Money borrowed to finance a structural budget deficit takes money from private investment.
- Corrective action is painful. Accepting that a huge increase in a budget deficit is unsustainable, then taking urgent action to cut spending or raise taxes, or both, will be painful.
- Lack of resolve. Political pressures can eat away at political resolve. What’s needed is eternal vigilance, and no fudging of tough choices.
In summary, we may not like the need for spending cuts, but we urgently need to return our national budget to a semblance of solvency.