UK debt and deficit: All you need to know

Fading £20 note MPs and experts will use different numbers for what appear to be the same thing

If the politicians in charge can't get it right, what hope for the rest of us?

In a party political broadcast last year, David Cameron claimed that "we are paying down Britain's debts".

As you will soon see, we most certainly are not.

And the prime minister is not alone. Last month, Chancellor George Osborne claimed the deficit had fallen by a third since the coalition came to power in 2010.

But in December, shadow chancellor Ed Balls said the deficit had not come down.

So who's right and what's what when it comes to the UK's debt and deficit?

Debt

This one is pretty straightforward, kind of.

Debt simply refers to the amount of money owed by the UK government. This is the debt that has been built up over many years by many governments - the running total if you like.

But be careful with the word total. The accepted and widely used figure for debt is actually the net debt of the UK; in other words, the total debt minus the government's liquid assets.

As the chart below shows, debt has increased massively in recent years, doubling to more than £1tn in the past five years, largely due to the financial crisis and resulting recession.

An easy way to compare debt levels across different countries is to express debt as a percentage of total economic output, or GDP, which is why you'll hear commentators regularly talk about the debt-to-GDP ratio. Obviously this has risen sharply since 2007.

And, according to the Office for Budget Responsibility, the UK's stock of debt will keep on rising for a number of years. So if anyone tries to tell you that UK debt is falling, they are wrong.

Public sector net debt
Deficit

Now things start to get a little trickier.

The current budget deficit, or surplus, is the difference between the government's everyday expenses and its revenues; in other words, between what it spends and what it receives. In recent years, it has spent a lot more than it receives, so we are used to hearing about a budget deficit.

But if the government spends less than it receives, then of course it would run a budget surplus. This may seem a strange concept in today's economic climate, but between 1998 and 2001 we had four straight years of surplus. In fact, there was a surplus every year between 1947 and 1974.

Both the government and opposition are pledging to return the current budget to surplus in the next Parliament.

And there is a direct link between the current budget and debt. If the government runs a deficit, it is effectively overspending and, therefore, in most cases adding to the overall pile of debt. By running a surplus, the government can chip away at this pile.

All fairly straightforward. The thing is, when most politicians and commentators talk about the deficit, they are not actually talking about the budget deficit. Helpful, isn't it? There are some exceptions - as a former Treasury man, Mr Balls talks about the current budget - but most are actually referring to government borrowing (see below).

Deficit/surplus
Deficit/surplus as % of GDP
Structural deficit

Now for the difficult bit. You will hear some politicians, particularly from the Conservative Party, talk not just of deficits, but of structural deficits.

The structural deficit is basically the current budget deficit, adjusted to strip out the cyclical nature of the economy. You would expect, for example, the budget deficit to narrow when the economy grows after a sluggish period. The structural deficit attempts to exclude the effect of this recovery.

In other words, the structural deficit is the bit of the deficit that remains even when the economy is operating at full tilt. Or put another way, it's the underlying deficit that is not directly affected by economic performance.

Structural deficit
Borrowing

Borrowing is... well, borrowing. Strictly speaking, borrowing and deficit (current budget) are not the same thing.

The two are linked, of course, as one covers the other, but the government doesn't just borrow money to pay back the deficit. It also borrows to invest.

The current budget covers everyday expenses - welfare payments, departmental costs etc. But the government also makes big investments, such as infrastructure projects, that are not included.

If the government is running a deficit, it may make investments on top of this, and will therefore need to borrow to cover both.

For example, in the calendar year 2007, the Labour government borrowed £37.7bn, of which £28.3bn was invested in big projects (the balance of £9.4bn represents the current budget deficit). Conversely, in 2013, the Conservative-led coalition borrowed £91.5bn, with just £23.7bn invested.

A neat, if rather simplistic, illustration of the different philosophies of the right and left in UK politics, some might say.

In the case of a surplus, the government may still need to borrow to cover its investments. This is why a current budget surplus does not automatically lead to a fall in overall debt, as borrowing to invest might be greater than the surplus. Equally, if government assets grow by more than the current budget deficit, then the deficit would not lead to an increase in overall debt.

Anyway, the important thing to remember is that, although there is a difference between the current budget deficit (or surplus) and government borrowing, for simplicity's sake commentators will usually quote borrowing figures when talking about the deficit. And you can see why, as they cover big infrastructure investment as well as everyday spending. After all, it is all borrowed money that needs to be paid back, and that adds to the overall pile of debt.

So there you have it. The next time you hear politicians arguing about debt levels and deficits, you'll hopefully be in a better position to decide who's right and who's wrong. Just bear in mind they could be talking about different things, so don't be surprised if they're both right. Or wrong.

Net borrowing

More on This Story

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

BBC Business Live

  1.  
    FLAGGING EUROPE?
    EURO FLAGS

    European banks have borrowed 82.6bn euros (£65.2bn) under a new scheme by the European Central Bank to boost lending across the eurozone. That is much less than the 150bn euros forecasted and raises several questions. Do banks have an appetite for this financing? And should the ECB go for full blown quantitative easing, which means buying government debt?

     
  2.  
    SONY SHARES 10:25:
    Sony phones

    Sony shares plunged more than 10% in Tokyo. On Wednesday it warned of even deeper losses this year due to weakness at its mobile phone business. It also scrapped its dividend for the first time since Sony listed shares in 1958. Until yesterday investors had been feeling more optimistic about Sony's prospects, shares were up 25% over just six weeks.

     
  3.  
    RETAIL SALES 10:15:
    petrol pump

    A bit more on retail sales here from the ONS. It says average store prices fell 1.2% in August compared with the same month a year ago. That's the biggest fall in five years. Prices in petrol stations are down 5%, which was the main contributing factor. Meanwhile, prices in food stores only fell by 0.1% but that's the first fall recorded since December 2004. The fall is the direct result of the supermarket price wars, the ONS adds.

     
  4.  
    BEST BEFORE 10:04: BBC Radio 4

    Solveiga Pakstaite, from Brunel University has invented a new food label that could potentially replace "best before" descriptions on food packaging. She has just won the James Dyson UK design student award. Ms Pakstaite has designed a "bio reactive" food label, which can track the actual condition of the food within the packaging. She's in talks with one or two companies about the new labelling system, she tells Today.

     
  5.  
    HEADLINES
    • French Connection shares plunge on results
    • Alibaba to price shares after US market close
    • Phones 4U bondholders seek rescue deal
     
  6.  
    GOOGLE ROW 09:54:

    "Phew!! What a scorcher!! Murdoch accuses Google of eating his hamster!" That is Google's response to an accusation from News Corp that Google abuses its dominance in the internet search business. For a more considered response, Eric Schmidt wrote this letter to the Financial Times last week.

     
  7.  
    RETAIL SALES 09:45:
    woman with hoover

    Sales of electrical appliances were a big contributor to the retail sales figures in August, the Office for National Statistics says. Appliance sellers told the ONS, that sales of high-powered vacuum cleaners rose markedly as consumers sought to beat a ban imposed on them as part of EU energy saving regulations, which came into force at the end of August.

     
  8.  
    RETAIL SALES Breaking News
    Shoppers leave a Tesco store

    Retail sales volumes in August were 3.9% higher than the same month a year earlier, official figures show. That's a rise of 0.4% compared with July.

     
  9.  
    ZALANDO SHARE SALE 09:19:
    Zalando website

    The hoopla surrounding the Alibaba share sale may be drowning out another internet firm raising money. Late on Wednesday Zalando, Europe's biggest online fashion retailer, priced its shares in a range of 18 to 22.5 euros . The firm, based in Berlin, aims to raise up to 633m euros (£500m). Zalando was formed in 2008 when it began selling shoes.

     
  10.  
    PLUS-SIZE FASHION 09:01: Radio 5 live
    Evans show, London Fashion week

    "Consumers are getting bigger," says Maria Malone expert in fashion buying and merchandising at Manchester Metropolitan University. More retailers are offering bigger clothing and Evans had a plus-size fashion show at London fashion week (pictured). On Radio 5 live Ms Malone quotes research from Mintel, which found in 2008 the market was worth £3.2bn and by 2015 it forecasts that it will be worth £6bn.

     
  11.  
    FRENCH CONNECTION 08:50:

    French Connection shares have plunged 13%. Earlier the retailer said it remains "cautious" about the second half of the year and is "dependent" on the Christmas trading period. On the plus side, the company cut its half-year loss to £3.9m, from £6.1m in the previous year.

     
  12.  
    MARKET UPDATE 08:26:

    European markets have opened slightly higher, following gains for US shares and Asian markets overnight. Investors have been encouraged by comments from the chair of the US Federal Reserve, Janet Yellen, who said US interest rates would remain low for a while longer. The FTSE 100 is up a touch at 6781.

     
  13.  
    TOSHIBA REVAMP 08:20:
    Toshiba building, Tokyo

    Japan's Toshiba is moving away from selling computers to consumers to focus on business customers. The reorganisation of its business will result in 900 job losses. The revamp will result in a cut to operating profit of 45bn yen (£250m). It says the consumer market for computers is "volatile and over-dependent on sales' scale and volume".

     
  14.  
    GOOGLE ROW 08:05: BBC Radio 4
    The Google logo

    Is Rupert Murdoch's accusation that Google is a "platform for piracy" timed to coincide with an European investigation into the search engine giant? Rory Cellan-Jones tells the Today programme big media owners such as Mr Murdoch may "sense an opportunity" to cause mischief after the European Commission, which had concluded its investigation into Google, reopened it under pressure from Germany and France.

     
  15.  
    BRIT IN BRUSSELS 07:55: BBC Radio 4

    "There is a real sense of scepticism," over the appointment of Lord Hill as the European Commissioner in charge of Financial Services across the European Union, BBC European correspondent Chris Morris tells the Today programme. Green MEP Philippe Lamberts tells the BBC: "When I first heard about this I thought it was a joke". He thinks Lord Hill will face a difficult confirmation hearing on 1 October. Lord Hill needs to prove he is "not just the personal envoy of David Cameron", another MEP tells the BBC.

     
  16.  
    PHONES 4U RESCUE 07:44: BBC Radio 4

    Bondholders of Phones 4U are offering to take losses on their debt, in return for saving the firm. To do that they will have to negotiate with the suppliers of network services like EE and Vodafone. This "calls the bluff of the networks" says BBC Business Editor Kamal Ahmed. It will test whether the networks really want to sell through independent retailers like Phones 4U, Kamal says.

     
  17.  
    EASYJET DIVIDEND 07:32:
    Easyjet

    Easyjet is raising its dividend from a third of profit to 40% of profit for its financial year, which runs to the end of September this year. It has also confirmed an option to buy 27 of the Airbus A320 aircraft. It expects to take delivery of the jets between 2015 and 2018.

     
  18.  
    Via Twitter Adam Parsons Business Correspondent

    tweets: "French Connection shares were 335p a decade ago. Now 70p"

     
  19.  
    FRENCH CONNECTION 07:21:
    A French Connection store front

    French Connection has reported a half year pre-tax loss of £3.9m, compared with a pre-tax loss of £6.1m for the same period a year earlier. Revenue for the period was £84m, down from £89m a year earlier. The company says it is remains "cautious" about the second half of the year and reminds investors it is "dependent" on the Christmas trading period.

     
  20.  
    ALIBABA SHARE SALE 07:09: BBC Radio 4

    Alibaba prices its shares after the close of trading in the US later today. Steven Hartley practice leader at Ovum Telecoms tells the Today programme the tech firm has about 80% of the e-commerce retail market in China. But he adds "only about half of the Chinese population has access to the internet" so the potential of a company with this kind of hold on the Chinese market is huge and that's why it is attracting so much investor attention.

     
  21.  
    'HAIRY HIPSTERS' 06:58:
    Hipster olympics Berlin

    Wake Up to Money speaks to some "hairy hipsters" in London's trendy Shoreditch. One claims to spend "as little as possible" on grooming. Martin Wood, from IRI says there has been a decline in the sales of razor blades. Those who do shave are doing it less frequently, perhaps because they work from home and the expense is an issue too, Mr Wood says.

     
  22.  
    END OF QE 06:52: BBC Radio 4

    Andrew Wilson of Goldman Sachs Asset Management tells the Today programme Wednesdays US Federal Reserve announcement on interest rates was "largely as expected". It reiterated that it will raise interest rates once a "considerable time" has passed after its stimulus programme ends in October. "Essentially it looks like 1.5% interest rates by the end of next year," he says.

     
  23.  
    ALIBABA SHARE SALE 06:30: Radio 5 live

    "You are getting a taste of the future," says Gordon Barber, from the centre for digital business at the University of Salford on Wake Up to Money. He browses the Alibaba website in his spare time. He says it can give an insight into where high street technology products will be in one or two years time.

     
  24.  
    ALIBABA SHARE SALE 06:16: Radio 5 live

    "Investors are punch drunk with new issues," says Justin Urquhart Stewart, co-founder and senior partner of Seven Investment Management on Wake Up to Money. He says that recent shares sales have been "overpriced" and "oversold". He adds investors want to wait until shares settle down before investing in firms like Alibaba.

     
  25.  
    ALIBABA SHARE SALE 06:10: Radio 5 live
    Alibaba HQ

    The BBC's Ali Moore in Singapore explains the extent of Alibaba on Wake Up to Money. It owns China's biggest online shopping site. It has an online payment system. It owns 35% of a department store chain and it wants a banking licence. But she says the firm does not face massive competition in its home market, so it's not clear how it will do outside China. Its shares are expected to be priced after the US markets close on Thursday.

     
  26.  
    PHONES 4U RESCUE 06:02: Radio 5 live
    Phones 4U store

    Bondholders "were extremely angry over what happened," says Justin Urquhart Stewart, co-founder of Seven Investment Management Wake Up to Money. He's referring to the collapse of Phones 4U. Its private equity owners took more than £200m out of the firm by loading it with debt. Now those holders of debt are offering to take a loss to keep the business going.

     
  27.  
    06:01: Matthew West Business Reporter

    Morning folks. As always feel free to get in touch either on email bizlivepage@bbc.co.uk or on twitter @bbcbusiness.

     
  28.  
    06:00: Ben Morris Business Reporter

    A group of Phones 4U creditors are offering a deal to help revive the firm, and find out why you should care about Alibaba. Stay with the Business live page.

     

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.