Making the Boring, Not Boring; the Deficit and the Fiscal Charter explained simply

Seems like we’re “generation debt”: all we hear is student loans, overdraft and stuff about UK’s budget deficit – which is apparently around £90 billion… but what does this actually mean?

 

What is the deficit?

The Deficit Decoded; the gap between what the government spends and what it receives in tax

The Conservatives want a surplus by 2020. Achievable?

The deficit is the gap between the amount the government spends and what it receives in taxes. It’s different to the national debt which is the total £££ the UK owes to investors from the UK and other countries.* (FYI we owe a lot to America).

Each year the government spends money on things like schools, the NHS, the army and benefits. This money mostly comes from taxes collected by HM Revenue and Customs.

The Chancellor of the Exchequer (currently George Osborne) is in charge of the country’s finances. They set the budget each year which outlines how much we pay in tax, and what gets spent where (we explained how the budget works here).

* For more information on who the UK owes money to take a look at this BBC report and blog post by Sky economics editor Ed Conway.

How it works:

If one year the government collects £100 in tax but spends £150, then the deficit would be £50.

Alternatively if £100 is collected but only £80 is spent then the government would have £20 left over at the end. This is called running a budget surplus.

In real life we’re talking a lot more money than this. The UK deficit is currently around £90 billion.

 

Is running a deficit normal?

Since the global financial crisis of 2008, “deficit” and “borrowing” have become dirty words. Understandably, the public don’t seem to like the idea of irresponsible governments overspending.

How the financial crisis happened;

Financial crisis in a nutshell; the banks ran out of money – the government had to lend them money.

Find out more about why the government had to bail out the banks; the financial crisis explained

The Conservatives claim that the current deficit is all Labour’s fault, as the previous Labour government was running a deficit at the time of the financial crisis. Expect to hear this a lot around election time.

Considering all this, it may surprise you that running a deficit is the norm for a lot of countries.

Whilst it is true that Labour was running a deficit before the crash, they had previously ran a budget surplus between 1998 and 2001. Before that point the UK (under Conservative rule) had run deficits each year since 1975 (with the exception of three years between 1988 and 1990 where there was a small surplus).

Which governments ran deficits?

UK budget deficit and borrowing by Mark McCormick for the Guardian  Deficit, national debt and government borrowing - how has it changed since 1946? VIA FLICKR https://www.flickr.com/photos/dullhunk/7419247784

Labour aren’t the only party to run a deficit – UK budget deficit and borrowing by Mark McCormick for the Guardian Via Flickr

 

Many well-respected economic experts like former Bank of England governor Mervyn King and senior Treasury official Nicholas Macpherson suggest that the banks are more to blame for the current situation, rather than Labour overspending.

However, increased government borrowing during the crisis (partly to save the banks, partly to pay for benefits as more people lost their jobs) meant the UK deficit shot up from around £34.5 billion to £90 billion and continued to climb. Ouch.

 

Austerity Measures vs ?

The Conservatives promise to cut the deficit and deliver a budget surplus by 2020.

Chancellor George Osborne’s austerity programme was supposed to bring the deficit down. In simple English: lowering government spending. Some of the austerity measures have proved controversial; such as cutting tax credits.

Rather than making cuts, some argue there are other methods to reduce the deficit. This include closing loopholes so that big businesses and non-doms pay the right amount of tax, and investing in public services.

The economist JM Keynes suggested something similar during the Great Depression of the 1920s. The idea was use unemployed workers to work on public projects. The workers would start spending their wages, which would get the economy moving again.

Is the Conservative 2020 deadline achievable? George Osborne’s original plan was to eliminate the deficit by 2015, but missed this target; managing to reduce the deficit by half.

This means that although public spending is coming down, the UK is still overspending and doing nothing about our national debt.  Are you sitting down? The UK national debt is currently around £1.5 trillion. Wowzers.

Global Debt

Deficit; UK debt as measured by GDP

In the red; government debt as a percentage of GDP… the debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP). A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.

Don’t panic though – the International Monetary Fund thinks the UK can survive with high levels of debt forever. Phew.

 

The Fiscal Charter AKA George Osborne’s plan to save the UK economy.

George Osborne Chancellor of the Exchequer Outside 10 Downing Street

Chancellor George Osborne wants to make it law to run a surplus

Current Chancellor George Osborne has created the Fiscal Charter. It’s a proposed new law which bans the government from creating a deficit in “normal” circumstances. This is defined as when the economy is growing healthily.

On paper this sounds like a sensible idea, no?

However, if the charter is passed it would make it harder for governments to borrow money for public investment. Why is this bad? Labour List explains in language we can understand:

“No one thinks it is wise to max out the credit card to pay for the weekly grocery bill, but just as families have a mortgage to pay for their home, so it makes sense to borrow for the infrastructure – like broadband, transport, scientific facilities for universities – which will increase our economic productivity and growth.”

However, perhaps it’s not a good idea to compare economics to your household budget;

 

 

So, what’s the answer? Suggestions on a postcard, please.

 

Deficit learnings; the current motto is “don’t overspend”, but it wasn’t always like this.

It’s hard to know who to believe. It’s even more confusing when politicians disagree over whether spending more than your income is good or bad.

What we do know: lending and borrowing is risky, so you had better be sure people can pay it back.

Will the Fiscal Charter work? Think we’ve missed something? Let us know in the comments below or email sor@scenesofreason.com

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The simple story of the Greek debt crisis in one graphic

 

 

Greece Bankruptcy: It’s All About Money

Five years ago, Greece ran out of money due to overspending on public services, lack of income due to tax dodgers and a global recession where the financial markets of the world collapsed.
Greece says: Oh £$*%!

The European Union (EU) and the International Monetary Fund (IMF) bailed them out and lent them €240billion.
Greece says: You guys are the best.

The catch: Greece had to make several “austerity measures” meaning cutting billions from public services and raising taxes to raise more money.
Greece says: Urm, no.

The Greek people were very unhappy about these measures and voted in a new anti-austerity government last year, led by Prime Minister Alexis Tsipras.

Why does this matter?

Every time Greece gets another extension to its loan their government have to agree to certain changes imposed by Europe. These include dropping some of the anti-austerity measures that got them voted in. Not great news if you’re a politician.

Grexit, Sch-mexit

If Greece can’t repay its debts and Europe refuses to cancel them Greece may be forced to exit the EU. Greek Exit = Grexit

If this happens Greece would be the first country in history to do so.

It could prompt other countries that have large debts – Spain and Portugal – to do the same.

Any country defaulting (not being able to pay back) on their debt would be a serious hit to the banks that gave them the loan and the value of the Euro would be affected. European banks would find it hard to borrow putting major strain on the economy.

Since the majority of Europe now uses the Euro – if a country were to leave the effects would be felt by all the other countries. Unstable Euro = Unstable Economy.

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