Question about the defecit?

drc

Ok, so we apparently have a deficit of approx £170 billion per year or thereabouts. The deficit has been increasing every year and after the credit crunch really exploded. What I don't understand is why the deficit will suddenly need to be dealt with or whether it can be prolonged indefinitely. If there wasn't an election this year, would the Labour party actually have to deal with the deficit or would they keep putting of dealing with it? What factors actually necessitate the reduction of the deficit (i.e. what would actually happen if nothing was done and borrowing kept increasing)? At what stage would external forces step in to do something if the party in charge refuses to and what are these forces (i.e. the IMF, the markets etc)? Perhaps someone knowledgeable in economics could help? Generali?

mbga9pgf

When the long term interest rates affect a nations ability to repay the total debt, you then have a major problem. Fine at the moment, but if the money investors expect to get for lending to the UK increases, we could end up in a pickle quite quickly.

The investors have delayed b*ggering us around a la Greece as they have investments already in the UK and its not neccessarily in their best interests; they want a Tory government who they know will get tough on debt. If Labour get in, the SWHTF unless they get serious on public spending and taxation.

The IMF will only step in if we have a soverign default, IE are unable to raise the cash to pay the bondholders. We then have a whole world of hurt as the IMF set conditions to any loan, IE raised IRs and masseve budget cuts. It would be massively deflationary.

JamesU

mbga9pgf wrote: »

If Labour get in, the SWHTF unless they get serious on public spending and taxation.

What is SWHTF? Thanks.

JamesU

CLAPTON

two related issues are
-our total debt
-the yearly deficit

the problem is our total debt
-because we have to pay interest on the debt which makes our deficit even larger (i.e. we are borrowing to pay the interest)
-much of the debt is short term debt and has to be refinanced; if our creditors are concerned about our ability to repay then they will demand higher interest rates

Now at the moment no-one is talking about debt repayment; we are merely talking about deficit reduction which means that the rate at which our debt is increasing will slow down a bit.

JamesU

drc wrote: »

Ok, so we apparently have a deficit of approx £170 billion per year or thereabouts. The deficit has been increasing every year and after the credit crunch really exploded. What I don't understand is why the deficit will suddenly need to be dealt with or whether it can be prolonged indefinitely. If there wasn't an election this year, would the Labour party actually have to deal with the deficit or would they keep putting of dealing with it? What factors actually necessitate the reduction of the deficit (i.e. what would actually happen if nothing was done and borrowing kept increasing)? At what stage would external forces step in to do something if the party in charge refuses to and what are these forces (i.e. the IMF, the markets etc)? Perhaps someone knowledgeable in economics could help? Generali?

From ONS link below:

"In the calendar year 2009 the UK recorded a general government deficit of £159.2 billion, which was equivalent to 11.4 per cent of gross domestic product (GDP).

"At the end of December 2009 general government debt was £950.4 billion, equivalent to 68.1 per cent of GDP.


I am no expert on these things for sure but as Clapton has said, need to look at the deficit and the debt. Just from looking at the two graphs in the ONS link....

(i) Looks to me like servicing the deficit year on year is not too difficult, if around 12% of GDP?

(ii) However debt has risen from 40% of GDP in 2006 to approx 70% of GDP end of 2009. And I have heard in the news etc that this figure is likely to rise to £1.5 trillion. If this is so, rough calculation:

£950 billion = 70% GDP
£1500 billion = approx 100% GDP

If correct, approx 12%/yr to service the deficit? And then X%/yr to start bringing down the debt to a servicable level?

And this X%/yr means lots of painful cuts that the politicians will not discuss with us? And despite the fact we are paying them to do their jobs and voted for them to run our country? I hope proper plans on how to get these figures under control, and the time-frame, are discussed properly by the parties in the pending economic X-factorus politikus voteforus, but don't hold your breath on this.

JamesU:(



http://www.statistics.gov.uk/cci/nugget.asp?ID=277

mbga9pgf

Looks to me like servicing the deficit year on year is not too difficult, if around 12% of GDP?

True, but we needd to cut public expenditure by 25% before we start to payy off the debt (or it starts to get eroded by inflation, if we get any).

Your assumption would hold true if the debt wasnt growing by 170 billion a year.

12% of the Deficit is over 4 times our national defence budget.

JamesU

mbga9pgf wrote: »

True, but we needd to cut public expenditure by 25% before we start to payy off the debt (or it starts to get eroded by inflation, if we get any).

Your assumption would hold true if the debt wasnt growing by 170 billion a year.

12% of the Deficit is over 4 times our national defence budget.

Understood. So,

Bringing the yearly deficit down to a sensible level (whatever this is supposed to be) to stop debt increasing: previously according to ONS around 2% before rise to 12%.....159 billion = 12%, 26billion = 2%, need to reduce the yearly deficit by roughly £133 billion. Does this sound right?

And then we need to understand what this £133 billion really means in relation to cuts in public expenditure? e.g. if 25% cut required this suggests annual public expenditure of around £640 billion (I am looking for a breakdown on government expenditure to understand this better)?

And then finally how to reduce the debt......

JamesU:eek:

shaven-monkey

Here's a pretty representation of where the money goes.
http://www.wheredoesmymoneygo.org/prototype/

From that nice picture, I believe that the UK is paying 31 billion per year to service debts in place.

JamesU

mbga9pgf wrote: »

True, but we needd to cut public expenditure by 25% before we start to payy off the debt (or it starts to get eroded by inflation, if we get any).

Great, have found the stats needed to understand this better as in link below. Do not understand the tables fully yet, but...


Table 1: total managed expenditure £630 billion.

So a 25% cut in this overall expenditure is equivalent to the approx £160 billion of annual deficit that needs to be reduced?


Table 2: Health = £90 billion/yr, Schools = £46 billion/yr, Defense = £32 billion/yr.Total of the three is £168 billion/yr.

So we would need to stop spending on the NHS, schools and defense just to clear the annual deficit?


And if the government debt is £950 - £1500 billion, in addtion to the deficit above we still have to figure out how to reduce this debt too?

JamesU:eek:

http://www.hm-treasury.gov.uk/d/pn_21_10_outturn_revised.pdf

Emy1501

Eu agreement is no EU country should have a budget deficit of more than 3%. Of course few countries are listening to that but we will have one of if not the largest. Most Euro countries are trying to bring theirs within the limit with 3 years we are only planning to halve in 4 years thats why the EU is saying labours plans are not good enough.

When it comes down it just like anyone the government can keep borrowing till noone will lend anymore and if it cant pay its debts it can go to the IMF or go bust. The government will rely on the markets believing they have a credible plan to keep being able to pay the debt and whilst they have one people will be happy to lend at a reasonable rate.

My understanding from what I have read is once your debt reaches 100% of GDP then as a country you cant grow or grow more than 1% and that I suspect would be the problem. Our debt will reach something like 90% of GDP by the end of next parliament and no party has a credible plan to stop it there and all three parties have a funding gap of about 30-40B which none are prepared to tell us how they will fill each year.

The belief simply is we are GB and therefore people will simply keep believing we will pay our debts what ever they are. Of course no party will tell us how they will do this and this is the worrying bit.

JamesU

Emy1501 wrote: »

Eu agreement is no EU country should have a budget deficit of more than 3%. Of course few countries are listening to that but we will have one of if not the largest. Most Euro countries are trying to bring theirs within the limit with 3 years we are only planning to halve in 4 years thats why the EU is saying labours plans are not good enough.

When it comes down it just like anyone the government can keep borrowing till noone will lend anymore and if it cant pay its debts it can go to the IMF or go bust. The government will rely on the markets believing they have a credible plan to keep being able to pay the debt and whilst they have one people will be happy to lend at a reasonable rate.

My understanding from what I have read is once your debt reaches 100% of GDP then as a country you cant grow or grow more than 1% and that I suspect would be the problem. Our debt will reach something like 90% of GDP by the end of next parliament and no party has a credible plan to stop it there and all three parties have a funding gap of about 30-40B which none are prepared to tell us how they will fill each year.

The belief simply is we are GB and therefore people will simply keep believing we will pay our debts what ever they are. Of course no party will tell us how they will do this and this is the worrying bit.

Nicely put.

Input from OPs on thread, quick searching and rough number crunching today has certainly helped me understand a little about where the UK really is with all of this. With a rough idea on the real figures and size of the problem, can at least now read up on whatever scant policies the politicians are suggesting to deal with all of this, and figure out for myself if any of what is proposed is sensible or just plain nonsense.

Guess a starting point is to find out what a potential rise in NICs is expected to bring into the coffers each year.....

Drc, good thread, thanks.

JamesU:)