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These are worrying times for the public finances as the deficit for the first half of the current fiscal year has hit a record in cash terms of £37.6bn. The full-year shortfall, if it comes in at £60bn or above, will also be a record in those terms. That will be equivalent to about 4% of national income, still well short of the record of nearly 8% set by the Tory administrations in 1993-4 at the depths of the last recession.
However, with many economists seeing public borrowing reaching nearly £100bn in 2009-10, or 6% of GDP, that record could be challenged in 2010-11.
So why does any of this matter? It is true, as Gordon Brown likes to boast, that Britain's overall debt position is favourable compared with many other leading economies. At about 40% of GDP, debt here looks lower than many other countries - France and Germany and the United States are 60%-64%, while Japan is way up at about 180% of national income.
The Institute for Fiscal Studies calculates that even after all the bank rescues, it should only push up to 50% of GDP and could then fall back again as the banks recover and are sold back into the private sector. If RBS is added on, though, the amount would be well over 100% of GDP.
While Brown is right about comparisons with Group of Seven economies, he is wrong about the wider group of industrial economies in the Organisation for Economic Cooperation and Development, where a third of countries have no national debt at all.
Moreover, Britain joins Luxembourg and the US as the countries that have made least progress on their national debt in the past decade. In 2001-02 Labour reduced it to just 30% of GDP, but it has been rising ever since.
Debt ultimately has to be paid back, or at the very least the interest on it has to be paid. In the last fiscal year, 6% of government spending went to service the national debt, a figure that will rise sharply as the debt shoots up. That means either less money available for other things such as doctors and teachers or tax increases.
The government is right when it says that it should let government borrowing rise in a downturn. It is quite wrong, though, not to have reduced the deficit to zero while the economy was strong. In other words, it shouldn't be starting from here.
- Government Borrowing
- Economics
- Economic policy
- Borrowing & debt
- Market turmoil
- Credit crunch
- Recession
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