14th September 2012
At a time of financial crisis we see that suddenly many who had no concern about debt at all get worried about it. This is an irony in itself as of course concern about debt might well of stopped the boom turning into a crisis! However human nature seems to set us on this course from time to time. But the debate about debt and indeed the (fiscal) deficit is often confused in the UK and today I wish to break it down to see where we stand and what we need to do. Until we get a grip on this I believe that we will see no sustained economic recovery.
This should be the easiest part but still we see politician's confusing the national debt with the fiscal deficit. In fact it is simple as one is what we owe and the other is the change in that or what we need to borrow.
The UK National Debt
There are two measures of this and the difference is whether you include the bailout of our banks in it or not:
"At the end of July 2012 the public sector net debt excluding the temporary effects of financial interventions (PSND ex) was £1032.4 billion (65.7 per cent of GDP). This compares to a PSND ex of £940.0 billion (61.8 per cent of GDP) at the end of July 2011."
So under the conventional measure we are finding our national debt increase and at a fair rate as illustrated below. Perhaps the simplest concept but politicians fairly regularly get this wrong:
"From 2008 public sector net debt increased sharply, rising from 36 per cent of GDP at the end of March 2008 to 66 per cent of GDP at the end of March 2012"
Adding in our bank bailouts gives a higher number and a more complex situation:
"The public sector net debt including the temporary effects of the financial interventions, at the end of July 2012 was £2,147.4 billion (136.6 per cent of GDP), (GDP is Gross Domestic Product)"
Here the rise in our national debt caused by the fact that we are borrowing more has over the last year been offset by the fact that the bank bailouts have reduced in size as some of it gets repaid. A year ago this measure was 147% of our annual GDP.
Public-Sector budget or fiscal deficit
Here the situation has got confused on several counts. All the main UK party's promised to reduce our fiscal deficit at the last election with the Coalition promising to do so more quickly than the opposition. How we have done so far was measured by the Office for Budget Responsibility in March:
"it has now fallen by 2.8 per cent of GDP since its post-war peak in 2009-10"
So even on that view we have made progress but are still borrowing at a high rate which the OBR expects to be 8.3% of GDP this year. The OBR forecast that we can continue that and accordingly would be approaching some form of balance around 2017. Unfortunately I was not entirely convinced at the time and the data since then illustrated by the quote below indicates that rather than reducing our deficit we look like we are increasing it:
"The figures excluding the Royal Mail pension transfer show that, for the year to date, public sector net borrowing has risen by 26.2 per cent, which compares to a forecasted 4.1 per cent decline for the full year."
So we face a possible future where not only is our national debt has upward pressure but we are failing to reduce our deficit as well. Indeed the deficit may even rise.
For those unaware of the Royal Mail pension transfer let me summarise the situation. Putting it "on our books" meant that in effect we declared a £28 billion surplus when in fact net liabilities were of the order of -£10 to -£15 billion. A type of financial alchemy and a clear misrepresentation in my view as it flatters this year's numbers for the deficit and has an ongoing effect on our national debt.
To avoid over-complicating matters the deficit numbers exclude the impact of the bank bailouts which currently as some repayments are being made help the numbers.
This issue is perhaps misrepresented even more often! Lot's of high and indeed scary numbers are bandied about. So let's start with what we as individual's owe.
According to the Bank of England total household debt in the UK is £1,410 billion. This is divided into secured (mortgage) borrowing of £1,253 billion and unsecured (credit cards and the like) of £157 billion. So on this measure we owe approximately 93% of our GDP and much of this is secured borrowing against an asset which is usually bricks and mortar.
This section I hope is relatively calming as it is something of a contrast to the scare stories put about. If we look at our secured or mortgage lending it is less than 30% of the estimated value of our housing stock. Now valuing our housing stock is quite a can of worms not least because I worry about future falls but we have quite a margin if we look at the overall picture. The main worry here is that some borrowers are way over-extended not that we are in aggregate.
Looking at unsecured lending as an aggregate it is currently falling and at £157 billion may not keep us awake at nights.
The issue here that can begin to mess with your mind is as follows.Because of the borrowing surge and the fears of that there is a natural tendency to pay some of it back. However paying it back tends at first at least to restrain the economy and may lead to more fears and more deleveraging. Of course if we borrow more we are continuing our past problem…
So far we have numbers which if not exactly pretty are something we could deal with. We may not currently be doing a great job but we could! However there is more to the story.
The Elephants In The Room
The UK Banks
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