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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What The Budget 2015 Means For Young People

First we had a budget in April; didn’t understand that. Now we’ve had a summer “emergency budget”? What’s that all about?

 

Hands up who was confused by the Budget 2015?

Changes to the Personal Allowance of Tax from Budget 2015

FYI; 81.6% of the UK fall into paying the basic rate of tax

George Osborne’s first budget of the new Conservative government was full of contradictions. On the one hand he is cutting £12 billion pounds from benefits (boo); one the other he’s creating a National Living Wage of £7.20 PH (YAY!)

The Emergency Budget 2015 Explained

The announced changes were met with cheers from the Tories, and outrage from the Opposition (Labour, Lib Dems, SNP, UKIP Plaid Cymru and the rest).

The Guardian has reported that the new “Living Wage” isn’t enough to make up for the cuts to welfare. People who claim tax credits could be £1,000 worse of a year according to the Institute of Fiscal Studies. Doesn’t sound great.

So how does the new budget 2015 affect you? The BBC has created a Budget Calculator. You can try it out for yourself on the BBC website; we thought we’d explore how the changes could affect different people.

 

Tax and Moneys

For Starters

Let’s say you’re 21/22. Perhaps you’ve just left university, maybe not.  You have a job on the minimum wage (currently £6.50 PH) working 40 hours or so a week. Your annual earnings would probably be around £13,000.

Calculation from the BBC showing if you are better or worse off from Budget 2015

£80 better off. Get in! Via BBC

Because the tax-free allowance is going up to £11,000 you’d end up around £80 better off. Yipee!

 

There’s more

So, lets look at the claim from the Guardian that due to changes to tax credits some people could be £1,000 worse offTax Credits are benefits (extra £££) given to people who look after children, to disabled workers and those on lower incomes.

In the new budget “working-age benefits, including tax credits and Local Housing Allowance, will be frozen for 4 years from 2016-17”

The calculator says a married couple with a combined income of £21,600 and two children could be worse off by £1,113. Hmm.

Calculation from the BBC showing if you are better or worse off from Budget 2015

Looks like the Guardian was right. Ouch. Via BBC

This was based on one partner earning £19,000 a year on full-time hours; the other working part-time and earning £2,600. Both at 25 (still young!) and the age you’ll become eligible for the new “Living Wage”.

Though they are £80 better off thanks to changes to income tax, on the whole they make a loss because they are getting less tax credits. In fact, the calculator suggests that in order to keep the same income they had before, the partner (who originally earned £2,600 a year) would have to earn an extra £10,978.56! Whether this is the case, we don’t know. But we sure hope not!

Calculation from the BBC showing if you are better or worse off from Budget 2015

Breaking even

Removing the two children from the equation means we’re back to £80 better off. Does this mean we shouldn’t have kids?!

Looks a bit like The Guardian 1, Osborne 0.

 

So are things better for older people?

An older married couple with a combined income of £85,000 would actually be £221 better off. Say what?

Calculation from the BBC showing if you are better or worse off from Budget 2015

Osborne’s changes are designed to help those on “middle incomes” Via BBC

This is again because of the changes to the tax thresholds where you pay the higher rate of tax.

Does this mean the budget will be better for the rich and worse for the poor? Although the media might say “YES”, it’s a lot more complicated than that. Like any example these calculations are very specific. Everyone has different circumstances so it’s probably impossible to come up with a basic rule which covers everyone.

It’s also worth saying (because the BBC did) that these figures are estimates only. They don’t include all the changes made; just the ones made to income and earnings.

People are still unhappy though. And if you’re under 25 you might be too. Whilst others get the fancy new “Living Wage” of £7.20 PH you’re going to be stuck on £6.50 PH. Minimum-bleugh.

 

What the calculator doesn’t include

The budget 2015 wasn’t just about tax and income; it covered a whole range of topics. The speech was even a few minutes longer than usual. Crazy times.

Forget University

One of the major policy brought in by the coalition government which affected young people was the raising of tuition fees. The new budget only raised them in line with inflation; but Student Maintenance Grants are being scrapped. These are non-repayable £££’s which are given to students from low-income backgrounds.

Instead of grants students will have to take out Student Maintenance Loans instead. Conservatives say “Don’t worry, you won’t have to pay them back until you’re earning £21K +”. As well as paying back tuition fees.

At the moment around half a million students in England receive grants. However some people aren’t too bothered;

https://twitter.com/JordanPlatten/status/619153109433118721

 

Where am I going to live?

So, you need somewhere to live. Don’t count on the government paying however. The Conservatives are stopping the automatic entitlement to housing benefit for 18-21 year olds.

Housing benefit is a regular £££’s to help pay your rent. It’s paid by your local council.  You can claim it if you’re on a low-income or claiming other state benefits.

 

Why the hate for the young?

So, not the best of times if you’re young and/or a student. George Osborne says he wants to make the tax and benefits system fairer.

“We have to move Britain from a low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare economy.

For Britain is home to 1% of the world’s population; generates 4% of the world’s income; and yet pays out 7% of the world’s welfare spending. It is not fair to the taxpayers paying for it. It needs to change.

The best route out of poverty is work. It is not acceptable that in an economy moving towards full employment, some young people leave school and go straight on to a life on benefits.

– George Osborne’s Budget 2015 speech

 

It’s not just young people who are affected by the budget. But even so, the Guardian asks “What have young people done to deserve George Osborne’s contempt?”. We’d love to hear from Mr. Osborne himself. So if you’re reading, George – is it personal?!

 

Budget 2015 learnings; some good, some bad, some ugly.

Is Budget 2015 unfair to young people? Or should people stop moaning about benefits and go and get a job?

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