Monday, August 17, 2009

Deficits and debt

Mark Pack and Neil Harding have very kindly responded to my post about the public finances.

In particular, Mark makes a fair critical point in response. I’d said: “To run a modest deficit year after year during a period of decent growth and high employment… is risky.” Mark replies:

There certainly is a symbolic value to whether the budget is in deficit or surplus, but what really matters is that in the good times you should be ensuring you are in a strong position to deal with bad times. … If you are running a small deficit, the combination of economic growth and inflation can mean that the overall debt burden is still coming down.

Absolutely right. If the extra debt we take on in a given year is outpaced by the growth in nominal GDP, then the debt burden as a share of GDP will fall.

In my defence, that’s not what’s happened in recent years. Borrowing has been a bit too high for it to be compatible with overall debt reduction: public sector net debt as a share of GDP has grown every year since 2001/02.

But the fact that, from then to 2007/08, debt grew by only 6.8% of GDP as compared with annual deficits summing to 15.8% of GDP, illustrates that growth does indeed reduce the debt burden of new borrowing.

4 comments:

Mark Pack said...

Thanks for those extra numbers Tom. I'll add in a link on my post.

Quietzapple said...

Fear not!

http://www.ifs.org.uk/bns/bn26.pdf

As Sam Brittan pointed out it is better to borrow to keep people in useful work than to fight wars, and the UK did the latter to a far vaster extent, in terms of current GDP for WW2 than is now in prospect.

The UK is not a corner shop with an irate, all powerful bank manager as Mrs Thatcher believed and the tories like to imagine.

Do not panic. (Oh, you weren't . . ?)

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