Wednesday, 15 October 2014

Tales of the deficit.

Us Labour supporters have our work cut out at the moment, from our telescreens, Big Brother relentlessly bombards us with negativity about a huge and irresponsible debt caused by the Labour party. People in our pubs and offices become animated and talk over us if we try to make a case in defence of Labour re the national debt. Conservative spin doctor Lynton Crosby is paid half a million pounds a year to perpetuate these tales of the deficit. But are these stories true? Did Labour or the Conservatives cause the national debt. I decided to do some research and was truly surprised at what I found out.

Public Sector Net Debt (PSND), the running total of all the money we have borrowed currently in the United Kingdom stands at 1,423.3 Billion Pounds . I think everyone agrees this national debt is a problem and we need to work towards repaying it as soon as possible. As of March 2013 PSND was equivalent to 74% of the annual total monetary output or Gross Domestic Product of the UK. The Gross Domestic Product is the measure of all of a countries economic output for a year.

The next figure we need to consider, is Public Sector Net Borrowing (PSNB) which is the total amount of money the government has borrowed in one year, PSNB is borrowing for public spending  eg the NHS and Defence + money borrowed for public investment eg road infrastructure projects. PSNB is the figure widely used by economists and commentators to describe how much money the UK has borrowed in any one year.

Another figure to bear in mind is the Public Sector Current Budget or PSCB which tells us whether the government are in a financial deficit or a surplus in any one financial year. Be wary though as the PSCB does not include the money borrowed for UK investment so it is not a reliable indicator of total borrowing in anyone year. But it does help illustrate how much public spending the government has got through in any one year.

The total amount of money that the government collects into it's bank in any one year is the tax receipts. Tax receipts mainly are income tax and vat but are also things like fuel taxes. If the economy is doing well and more people are in work and businesses are making more sales, tax receipts are higher for the government and they need to borrow less money or no money. If the economy is doing badly with less people in work and businesses making less sales, tax receipts will be lower and the government have to borrow money to meet their financial liabilities.

So annual UK Tax Receipts minus annual UK Public Sector Spending determines if we run a deficit or a surplus in any one financial year. If the UK spends more than it receives in that financial year it will have Public Sector Net Borrowing for that year, if the UK spends less than it receives there will be no PSNB in that year and UK will run a surplus and be able to repay some of the PSND that year.

The annual inflation figure is another useful key indicator of the UK economy. Inflation is the measure of increase or decrease of  the price of goods and services in the economy. Low inflation is generally sought after as it's good for economic stability. The economic indicators mentioned are all the main tools used to measure the UK economy, generally since 1997 inflation has been low. The figures in this article, unless stated otherwise, are in the current prices of the year in which they relate to; even taking the small increases of inflation into consideration the figures below still make interesting reading.

So to answer our original question did Labour get us into a debt mountain mess we need to look at the Public Sector Net Borrowing figures for the last few years. I've added in a chart to make it clearer.

Public Sector Net Borrowing 1993/1994 to 2012/2013 Source ONS


Let's be really fair to both the Conservatives and Labour and compare the first four years of  the Tory Coalition with the immediate preceding four years before when Labour were in power. So between 2010 when the Tory Coalition came to power and now in 2014 the Conservatives have borrowed £439 Billion. I have added the £99 Billion (not shown in the chart)  that the government borrowed in 2013/14 from the ONS statistics  here. In the same preceding four year period between 2006 to 2010 The Labour Party borrowed £327 Billion pounds. Labour borrowed £112 Billion pounds less than the Conservative coalition have borrowed in the same four year period.

Even if you count up all the money Labour borrowed between 1997 and 2010 at 419 Billion - it is still less than the 439 Billion the Conservatives have borrowed between 2010 and 2014.

Note from the chart that PSNB has slightly decreased since 2010 but only  in relation to the two financial crisis years 2008/9 and 2009/10 which were exceptional circumstances. Also note that between 1998 and 2001 Labour did not borrow a penny, in fact Labour ran a surplus of £59 Billion in those 3 years as you can see on the XLS chart here.

If you consider Public Sector Net Borrowing as a percentage of GDP, you can see in the chart below how borrowing increased when the financial crisis hit in 2008, 2009. However borrowing continued to be exceptionally high when the Conservatives came to power in 2010. PSNB as a % of GDP is useful as it reveals how much money the government have borrowed in each year in relation to GDP, so it's especially good for use in long term comparisons as it includes inflation.

Generally between 1998 and 2010 Labour either ran a surplus or borrowed smaller amounts of money. It was only when the financial crisis hit in 2008, 2009 and GDP  lowered to unusual low levels of around -2% that Labour borrowed more money, tax receipts were  lower when the global financial crisis hit also. The situation was an unusual emergency and Labour were forced to borrow more to meet it's financial obligations eg fixed cost spending on the NHS and pensions. Generally, Labour were financially prudent throughout their last long period in power.

If you look at the chart here you will see that during Labours last time in power they borrowed broadly equivalent to that which the Conservative John Major government borrowed during their last term of office. Historically both main parties have been increasing the national debt.

What's more despite the Conservative  claims of Labour having a  foolish strategy on borrowing in 2008, 2009 the Conservatives  in effect justify and agree with Gordon Browns strategy by continuing with it - by borrowing  unprecedented high amounts of money since 2010 . This all in a context of the global and UK economic crisis slowly starting to improve.

It is false for David Cameron to claim that he has been 'paying down Britains debt' as he recently did. In fact we can see here in the Daily Mail how he was reprimanded for that inaccurate claim. As proven above, the Conservatives have borrowed  more money since 2010 than Labour borrowed between 1997 and 2010. The claim circulating that Labour are financially not to be trusted is cunning but mistaken. The truth is, despite the telescreen messages, since 2010 the Conservative coalition has massively increased UK Net Debt.

James Bickle.