I’m getting back on track after a flurry of meetings, events, and necessary recovery time. I’ve been meaning to do a series of posts on our economy. Now seems a good time, after the first coalition budget, defence review, and comprehensive spending review.
The starting point is to look at the key indicators of our economic well-being; the National Debt, Budget Deficit and Structural Deficit, Balance of Payments, and Inflation.
The National Debt is, in theory, the total amount of money the government has borrowed to pay for wars, and infrastructure. Stuff you could define as investment.
Looking at the National Debt as a % of GDP,which is the total value of everything produced in the country, is a good way of relating it to the size of the economy.
What’s the size of the National Debt?
You’d think there would be a simple answer to this question. Nope, it depends what you include in the calculation. The official national debt is £932billion, equivalent to about 62% of GDP Some people think our national debt is as high as £7.9 trillion. These two sources describe the difficulty in measuring the national debt.
Where does the money come from?
The government sells ‘gilt-edged’ securities, for which it receives money against a promise to redeem the loan at some future date, and on which they pay a small but guaranteed and regular interest. UK pension funds and insurance companies are the biggest purchasers of gilts, followed by foreign investors, all of whom are looking for a safe investment.
What are the problems?
There are a number of problems, which are:
- Borrowing for lifestyle not investment. It’s possible to argue the case for using debt to invest in roads and the like, but to borrow to pay for welfare and health spending is not investment, it’s living beyond your means, which is what we’ve being doing for some years. It’s unsustainable, even in the short-term.
- Speed of its increase. In the year 2000-1 the national debt was £311 billion, by 2010-11 it’s reached £932 billion. Uncontrolled increases in debt cause investors to worry about the ability of governments to repay the loans, and also to meet the interest burden, which results in an increase in the cost of borrowing money. Strong investor confidence lowers borrowing costs.
- Size of the interest bill. The interest we pay for borrowing £932 billion is £42.9 billion, which is more than we spend on defence. Again unsustainable.
- Difficulty of reducing the national debt. It took until 2006 to repay loans from the USA to pay for World War II. The debt can be paid down only when our economy grows and national income is higher than spending. Now that’s a tough call at present.
In summary, managing the national debt is hugely important. It’s not an arcane subject. It’s an accurate reflection of the state of our economy.