Economics made simple (1) Debt, Deficit and Independence

| 01/04/2014 | 5 Comments

Debt and Deficit

When in any single year, a government spends more than it raises in revenues (taxes etc) it is in deficit. To cover the gap,¬† the government has to borrow money (assuming it does not have any reserves). That borrowed money is the government’s debt, and it will have to pay interest on it to the banks / financial institutions who lent the money.

With each year that the government is in deficit and has to borrow more money, the debt will grow, and so will the interest payments on it.

Cyclical Deficit
When a government takes more money in than it spends in a year, it is in surplus and can repay some of  its debt. The theory behind cyclical deficit is that when times are bad a government runs a deficit and borrows to cover the gap, allowing it to continue paying for its spending committments. Then, during good times when it is recording a surplus, it will pay back the debt it borrowed.

Structural deficit
A structural deficit is altogether nastier. This means that even when the economy is operating at maximum potential and tax revenues are high, the government is still spending more than it takes in,¬† and so still accumulating debt. George Osborne originally promised to eliminate the UK’s structural deficit by 2014-15, but has had to revise his forecast to 2017-18

Debt and Deficit in the UK
In March 2014, the UK government’s net debt was¬£1.24 trillion pounds. This is forecast to rise to ¬£1.57 trillion by 2017-18.

The deficit for the year to March 2014 was  estimated at £107.8 billion pounds.  George Osborne expects this to fall each year until 2017-8, at which point he forecasts a surplus of £5billion.

uk-debt-interest-payments-total

 

Debt Interest payments
In 2014 alone,  the money UK taxpayers will pay in interest to those who have lent to the UK will be £47.9 billon.

 

This is forecast to rise to  £67.9 billion by 2018.
£47.9 billion could pay for about 30 new hospitals, such as the 2010 Royal Derby.

 

Scotland’s Share

Scotland’s share of the UK’s debt interest repayment, on a population basis, was calculated as being ¬£4.02 billion in 2012/13.


Imagine a line of¬† of 186,593 newly qualified Scottish primary teachers in Scotland a metre apart, stretching almost from Edinburgh to Inverness, handing over all their salary¬†each year to the UK treasury. That’s how much Scotland is paying.

fiscal surplusA debt we never needed
The UK debt had been reducing since a high point following¬† World War II, but this progress slowed and it started to build up again from the late 70s. ¬†In 1976 the UK¬†faced a Sterling crisis during which the value of the pound tumbled and the UK found itself with insufficient funds to maintain its spending commitments.¬† Scotland’s stronger economy on a per head basis and the growth of oil revenues (particularly in the 80s) meant that the UK’s growing debt was not generated by the Scottish economy. ¬†If Scotland’s finances had been managed as if it had been an independent country from 1980 onwards this ¬£4.1 billion burden would not exist.

As this chart shows, Scotland ran a significant surplus throughout the 1980s.

If Scotland had been an independent country for the past 33 years, its¬†higher revenues would have meant that we would not have had to borrow a single penny. ¬†In fact Scotland would by now have a cash surplus of at least ¬£50bn. Scotland has been¬†paying billions of interest on loans Scotland didn’t need. ¬†This enormous subsidy from Scotland adds up to nearly ¬£72 thousand million pounds to date, and is growing at ¬£127 per second.

The level of Scotland’s share of the UK debt following independence will depend on the negotiated division of the UK’s assets. The Scottish Government’s suggestion in accordance with the guiding international conventions is that if Scotland ¬†accepts population share of the debts then it must inherit a population share of the assets.

As the Financial Times reported An independent Scotland could also expect to start with healthier state finances than the rest of the UK.

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Category: Economics of Independence

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  1. Sandra says:

    Could someone explain why we would be expected to actually reduce debt if we went independent.

    The uk government isn’t even expecting to be able to stop adding to it’s debt ie it’s only trying to cut overspend each year

    Why would Scotland be expected to pay back debt as I assume £23 billion is actually a payment to cover capital and interest.

    Can someone explain, is this because the debt actually doesn’t get sign into Scotland’s name – continues to be held by the uk and we then pay back to the uk under terms that differ from the pace that the uk would pay back this debt, ie we have to do it faster?

    NIESR experts predicted an independent Scotland would inherit debt of about £143 billion, leaving a debt to GDP ratio of about 86 per cent.
    Without the resources to cover the obligation, an IOU would be created where the Scottish Government makes annual payments to cover its share of debt. About £23 billion would be needed in the first year, plus money to cover the fiscal deficit, according to the NIESR.

  2. Danny Small says:

    I find all this heavy going and I depend on the experts. Taking a simplistic approach last year was a bad year and our deficit was £13bn, Perhaps in a good year we could get this down to £5bn.

    Does this mean that we have stuctural deficit of about £5bn and austerity will have to continue to get this down?

    Am I talking rubbish?

  3. I am a big fan of this site, but I think this blog post repeats a lot of common and harmful misconceptions about budget deficits. I posted a comment on your FB post about it, so i won’t repeat my comments here. However, for an alternative explanation of government finances, I recommend this post (“Budget Deficit Basics”) by Prof. Bill Mitchell:

    http://bilbo.economicoutlook.net/blog/?p=14044

    I also recommend reading through (if you have the time) the Modern Money Theory Primer on http://www.neweconomicperspectives.org

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