Barely a press conference or TV debate goes by when the deficit isn’t brought up. Unfortunately, when politicians say that they are reducing, or aim to reduce, the deficit, what many people hear is that they are reducing the national debt. This is not the case. Talking to people particularly since the leader’s debate, it has become clear to me that this misunderstanding isn’t uncommon. Seemingly, economics is one area people don’t investigate for themselves, but rather stick to what politicians say or imply to be true. For clarification, the deficit is the difference between what the government receives in tax and what it spends. The national debt is the accumulation of past borrowing. The national debt rises with interest payments and new public sector borrowing. Below, I have nabbed fellow Gerald Steele’s lecture slide to give you an idea of the difference in size of the two.
(LU Management School Reader Gerald Steele, 2014)
A couple of years ago, the Centre for Policy Studies released a report on this issue, entitled ‘A Distorted Debate: The need for clarity on debt, deficit and coalition aims’. The report, still relevant now, explains how the two concepts are still widely misunderstood, not helped by the incorrect use of the terms by select politicians and journalists, who have both at times been guilty of suggesting that the government is reducing the national debt. Journalists have picked up this phrase and proceeded to run with it during the election campaign, with questions to the potential Chancellor’s being dominated by queries about how they will reduce the deficit, completely missing the opportunity to grill the candidates (one who has served as Chancellor of the Exchequer for five years, the other a Harvard educated economist) on wider economic issues. This comes, obviously, only after they’ve been asked questions like ‘what is 6 x 7?’
Politicians on all sides are similarly guilty. The simple truth is the national debt is rising and it is a complete fallacy to profess otherwise. As demonstrated by the graph below, in 2010, when the coalition came to power, government debt stood at 67.1% of GDP. In 2014, this figure raised to 90.6% of GDP.
Early on, the coalition declared they would reduce the deficit by a third. Stephanie Flanders, Chief Market Strategist for UK and Europe at J P Morgan Asset Management, discussing this point in an address given to the Royal Economics Society, said “depending on what your standards are, reducing the deficit by a third is not necessarily that impressive….You wouldn’t necessarily think that you would brag about it consistently”. More recently, Professor Simon Wren Lewis of the University of Oxford noted how “the idea that in 2010 we were in a deep hole because of the deficit is just fantasy macroeconomics. It replaces something real (a financial crisis and deep recession) with something of little immediate consequence”.
Centre for Policy Studies (Twitter @CPSThinkTank), A Distorted Debate: The need for clarity on debt, deficit and coalition aims, Accessed: http://www.cps.org.uk/publications/reports/a-distorted-debate-the-need-for-clarity-on-debt-deficit-and-coalition-aims/
Stephanie Flanders (Twitter @MyStephanomics), Royal Economics Society Address, Accessed: ttps://www.youtube.com/watch?v=uJY_OADCHls
Simon Wren Lewis (Twitter @sjwrenlewis), ‘Fantasy Macroeconomics’, Accessed: ttp://mainlymacro.blogspot.co.uk/2015/03/fantasy-macroeconomics.html