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.


Mark Pack said...

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

Quietzapple said...

Fear not!

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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