Some definitions:
The deficit is simply how much more the Government spends each year than they receive in tax. (With you so far - ed)
The deficit is funded by borrowing money (ok - ed)
Each year of deficit is added together and is called the National Debt (Phew, that was understandable - ed)
For the year 2011-12, the amount of money that the Government received in tax is the gigantic figure £550,000,000,000, how much, £550bn (only approximate you know, they really can't get more accurate than that - ed). How are we supposed to deal with a number that big? How does it relate to our daily lives?
What is most surprising, is that even this enormous number isn't enough. 'Da Government' (tm) are spending more, yes more, they actually spent £690,000,000,000 aka £690bn (approximate as well - ed).
This means they spent £140bn more than they took in taxes! This was financed by borrowing £140bn from the markets (I wonder who that is, not us is it - oops - ed) to keep to their existing spending plans. So they are spending 25% more than they are receiving, that is simply totally outrageous!
In more human terms, it is like a tax paying citizen getting a net £30,000 salary but spending £37,500. Can you afford to spend 25% more than you earn? If so, presumably not for long!
What is more, this £140bn doesn't go away, it is added to the pile of debt, that we, yes, you, me, and our non-tax paying, non voting children, will have to pay back at some time in the future, this leads to what is called The National Debt.
Hang on a second, 'Da Government' (tm) are racking up debt that we then have to pay back? Unfortunately yes, it means that the politicians, remember these are the people who got a mandate from the electorate (or not as in that particular argument - ed) are spending money all of us haven't even yet earned, let alone paid tax on!
Now, of course, this massive over spend is never shown in the above light, i.e. how much more they are spending than they are receiving, no, that would be too easy. A number like 25% overspend doesn't go down well, too big a number, so what the politicians do, and not just ours the whole darned lot of them, they use an internationally recognised comparison designed to make it look not quite so bad (simply brilliant - ed)
How do they do that then? They compare this yearly deficit against the UK's yearly GDP (the GDP for the year 2012 was about £1,533,000,000.000 or £1,533bn), why? It makes the overspend seem much smaller! So, as far as ' Da Government' (tm) and the international financial markets are concerned the deficit, this 25% overspend is in fact calculated as (140/1533)*100 which makes for around 9% deficit for 2012. Now 9% sounds much more managable than 25%, don't you agree?
What about the debt? Well, The National Debt, that is the total amount of money that the Government owes well to be more precise the total amount of money to be paid back by current and future tax payers (all of us voters, those non-voters, and even those without a vote - ed) was by 1st April 2012 about £1,278.2bn and increasing each year as each year's deficit is added to that figure.
My oh my, that sounds like a lot of money! So the 'Da Government' (tm), yet again get away with comparing this enormous number against the UK GDP another enormous number, because it makes for a percentage figure that is internationally recognised (hurrah - ed). As of Q1 2012 the National Debt was 86.8% of GDP.
On a more human level this is like the UK tax payer on a net salary of £30,000 and having a total debt of £26,040.
So, if the government stopped all spending, and used all government tax receipts to reduce the National Debt to 0, it would take about 2 years 4 months. Well obviously this is unacceptable to the populace, as we quite like our NHS, schools, libraries, police, armed forces, civil servants, pensions, welfare, government ministries, secret services, government waste and so forth and so on. The country would not survive if they stopped spending on everything!
What is perhaps, less obvious but even more disturbing is that we are paying interest on the money that the Government has borrowed? Eh, what do you mean. I mean that the markets that loaned the money to the Government, want some interest on the money they have loaned, and they will want their capital back at some point to.
Really? They want interest and their original money back as well, how come? Well, it is just like if you took a loan from the bank, you will have scheduled payments over a number of years to pay back the loan. But, in fact it is more iniquitous than that. The money that has been lent (remember by the markets - ed ) is paid back interest only, that is the full original amount has to be paid back in a lump sum at the end of the period, usually 15 years in the case of the UK.
In 2012, this interest only loan was costing £43bn. Yes, £43,000,000,000. Quite a big number. If compared to the taxes actually raised (£550bn - ed), this gives us a percentage figure of (43/550) *100 = 7.82%. (Not how the government calculate it - they, yet again, compare this to the UK GDP and come out with a percentage of 3% - economics ed). Whichever way you put it, the interest still has to be paid and the capital has to be paid back.
If we put these astonishingly large figures in the more human understandable terms of our £30,000 a year tax payer, it would mean that they would be paying interest only of £2345.46.
Hang on, I think I understand all that, but how do the Government pay back the capital that those market chappies lent us? I mean is there a massive balloon payment at the end of the period, where all of the capital that was borrowed has to be paid back, well yes there is! Well done, you are starting to get it.
Now, you will like this (not a lot - ed). When the time comes, the Government will simply borrow more money from the markets and use that to pay back the capital on the original loan! So one outsanding loan's capital is paid off by taking out another loan! Brilliant, who would have thought that!
Now, naturally this cannot continue indefinitely, can it? We shall wait and see.
A more balanced view (really - ed), that is looking at historical graphs of government spending, the various changes in the deficits (and surpluess sometimes - economics ed) and the National Debt in the UK (since the 1700's) show that deficits can be brought under control, and that National Debt can be reduced.
The Government simply has to:
- stop spending more than it is receiving in tax, i.e. reduce the deficit to 0 and preferably run a small surplus (so stopping the increase in the National Debt and in line with that stopping the increase in Government spending on the interest only loans that finance this deficit)
- put money aside each year to pay back the loans capital
The most interesting question is how they go about doing this! You might think that all of the members of the House of Commons be they in Government or in the Opposition could agree with those two simple statements. Actually, no they can't. Amazing isn't it.
Afterthought
The UK National Debt is a very easy website to read, lots of nice graphs, with far far less of the ranty comments that I tend to make gives a plain spoken, serious look at the whole malarkey.
The Guardian has a couple of useful pages, one on government spending, and one that give you figures for government tax receipts (our tax pounds - ed) and some wonderful graphs for where the government spends our tax pounds.
The UK Public Spending website is simply fabulous, not only does it have all the data, but it lets you create your own graphs to help you grasp all the figures in ways that are meaningful to you.
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