Tag Archives: deficit

Not worth the panic: This deficit is manageable

To my great frustration, almost every coalition government policy announcement has been prefaced with something along the lines of ‘we must take this action due to the enormous national deficit we have been left to deal with…’

Thusfar this premise has gone woefully unchallenged. Rather than comparing the deficit to something arbitary (like our education or health budgets as I’ve seen Tories doing) let’s compare the current deficit with our national deficits in the past.

The best way to compare deficits past and present is to use a relative measure – deficit as a percentage of GDP. Currently the UK national debt is 71% of GDP. Yet we’ve been well over that in the past century. In 1923 it was 181%, 110% in 1940 and 238% in 1947. We’re fighting an economic battle to recover from the credit crunch, running up a little deficit is to be expected.

The key issue with debt is the interest you need to repay. On that front the current deficit is also not as alarming as the government would have us believe. UK national debt interest repayments peaked at around 7% of GDP in the 1920s. We’ve never been near that level since, and currently interest payments are between 3 and 4% of GDP. Economists feel interest repayments are not a risk until they hit something around 12% of GDP.

The other risk with debt is how quickly you have to pay it off. Thankfully the Treasury have been, dare I say it, ‘prudent’ in how they have raised debt. The average UK debt maturity is 17 years. In other words the average of the repayment terms on our debt means we have 17 years to pay it back. Spain are currently struggling to push their average debt maturity up to just 6.7 years. Spain, Italy and Greece have all been facing huge immediate repayments on short term debt they’ve been using. The UK in the meantime has time to manage the deficit as economic circumstances allow.

So the government’s attempts to protray the national financial position as a househould who have splurged on the credit cards is woefully inaccurate. We don’t have only 30 days to pay it back, the interest isn’t spiralling out of control and we’re not in the worst position ever.

While there’s no doubt that ideally any government should work towards lower deficits, timing is also important. Essentially the cuts we’re going to see imposed on us tomorrow are like starving your family in the hope of paying your mortgage off more quickly.

It doesn’t make sense. Mortgages are stable long-term debts at reasonably stable rates of interest. Starving the family just when they are facing the challenge of a recession is, to put it mildly, foolhardy.

Even running up a little more long term debt to look after our society — with benefits and quality public services — makes moral and economic sense. We would be caring for those most in need, and keeping people in jobs. Which is exactly what our economy needs.