Ben Mitchell presents the first part of his two-part primer in economics. Essential reading for all Left Foot Forwardistas.
The British/European/global economic downturn/credit crunch/crisis/recession from 2008, and now making an unwelcome return in 2011/12, seems to have piqued many peoples’ interest in all things economic.
You don’t need to fully understand what exactly a hedge fund does, or what is meant by derivatives or naked short selling (if only it means what it sounds like it means), or that getting a ‘haircut’ now has another meaning, to want to know more about the economic reality that exists in the UK at the moment.
And for that, a sound grasp of the basics is more important that being an expert of each and every intricate financial term. But, thank you BBC for this very helpful financial glossary, all the same.
Here is an attempt to makes things a little clearer:
The principal narrative of the coalition government is that they inherited a huge budget deficit; that is the amount by which government spending in a year exceeds its income, in terms of taxes and receipts.
It is also referred to as public sector net borrowing (PSNB): the total the government has to borrow each year, resulting in it racking up a deficit, measured as a percentage of GDP.
By GDP, we mean the total economic activity of a country, in terms of all the goods and services it produces. It measures the health of the economy.
The deficit taken on by the coalition was worth £156.1 billion, 11.1 per cent of GDP (pdf, p.24), which was actually around £11 billion lower than the £167 billion forecast for the end of the financial year 2009/10, by the then Labour chancellor, Alistair Darling, in his final budget.
It is important to note that this figure excludes the money spent bailing out UK banks (RBS, Lloyds TSB, HBOS) during the 2008 credit crunch – a total which has fluctuated wildly from a commitment to propping them up to the tune of £1.162 trillion back in 2007, to £612.58bn by March 2010, and then down again to £456.33bn at the end of March 2011.
Then there is the UK’s government debt, or its public sector net debt (PSND), which is the total amount of money the government owes. It is worked out as an aggregate figure, and is the accumulation of all the fiscal deficits, all government borrowing, accrued over previous years, and which is still to be paid off. Thus, each year’s deficit gets added to the existing debt.
The present government inherited debt of £759.5 billion or 52.7 per cent of GDP, for the end of the 2009/10 financial year, according to Treasury figures (pdf, p.95) released in March’s 2011 Budget.
So, who exactly does the government owe this debt to? In short, most of it is owed to us.
Debt can be divided into internal debt, money owed to lenders within the country, borrowed from those in the private sector, such as pension funds, investment trusts, building societies, and external debt, that owed to foreign lenders.
The UK Debt Management Office (DMO) is charged with managing the government’s debt through the sale of gilts (risk-free bonds), Treasury bills, and bonds. The latter act as the government’s debt security. The government issues bonds, which are bought up by various bodies in the form of loans (debt investment), which it then has to pay back at a fixed (maturity) date, with interest. UK government bonds are seen as relatively secure and risk-free investments as buyers know that they will always be repaid.
Pension funds and insurance companies are the biggest owners of government debt, making up almost a third of it.
The biggest increase in debt since 2007 has been caused by the bank bailouts, and the need for quantitative easing (printing money), in order for these financial interventions to have been possible. And, about a third of debt is external, owed to overseas investors.
In order to make sense of the UK’s debt and deficit figures they need to be put into context.
In historical terms, the UK had the largest budget deficit since 1945, and the biggest since the early 1990s. Its current debt stood at the highest levels since the late 1960s. History tells us that the British Empire was in fact built on debt.
However, over the last 100 years, debt levels have been higher before. A lot higher in fact: at 250 per cent of GDP at the end of the 1940s, and over 100 per cent during the 20s and 30s; the result of having to fund two world wars. And, as one economics commentator points out, the enormous debt built up during the 1940s also coincided with the creation of universal healthcare and the welfare state. Rather than paralyse Britain, this was followed by three decades of strong economic growth.
How does this compare to other countries?
By the end of 2010, the UK had the third highest budget deficit of all the nations in the EU, with only Greece and Ireland worse off. For the same period, even though the UK had above average levels of debt, it was still less than France and Germany, and came ninth overall within the EU.
It is important to recognise that the EU, and other bodies such as the OECD, an economic think tank of the world’s wealthiest states, measure deficit and debt using a different methodology to the government.
For the EU, stats are compiled using methods prescribed by the 1992 “Maastricht Treaty”, which advised member states to avoid excessive debt, equivalent to 60 per cent of GDP, or deficit levels exceeding three per cent of GDP. They therefore found UK deficit levels of 11.6 per cent of GDP, and debt worth 71.2 per cent of GDP, for the end of the 2009/10 financial year.
Globally, the Treasury pointed to OECD stats, which in May 2010, estimated that the UK would have the highest deficit of all its members, as well as IMF forecasts predicting that the UK’s 2010 borrowing would eclipse all other countries in the G20.
Final figures released by the IMF (p.121) for 2010 found the UK, pipped only by the US, in having the second highest budget deficit of all G7 and G20 nations, with Britain’s excess borrowing way above advanced economies and Eurozone averages.
Yet, the IMF also showed that, when it came to government debt, Britain had the lowest levels of all G7 states (p.127), and close to average levels of the countries in the G20.
So, those are all the necessary facts and figures out of the way.
The second part of this article, coming tomorrow, looks at who, or more accurately what’s, to blame for all this. And what solutions are needed, and which aren’t.
Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.
• We must stand with shareholders that want a better economy – Cormac Hollingsworth, January 31st 2012
• Politics vs Economics: setting the scene for the Fabian’s Next Economy conference – Marcus Roberts, January 13th 2012
• Cable falls in line with Beecroft’s anti-worker voodoo economics – Alex Hern, November 23rd 2011
• Vindicated Balls gives absent Osborne an economics lesson – Shamik Das, September 15th 2011
• An economics lesson for the growth deniers – Ken Livingstone, March 26th 2011