Public Deficits and Public Debt: What are they and is there an alternative framework to reduce them?
by Raphie de Santos - 14/06/2010
There has been much talk in the media and with politicians over the last year about the size of our public deficit and debt and how we must reduce both. It has been confusing to people what is actually meant by these terms and how we have arrived at record levels of public deficits and public debt. The debate on how we reduce them has been limited to timing and different ways of reducing public expenditure.
What we wish to explain here is what these two terms mean- deficit and debt - and show there is an alternative framework for cutting the deficit and the debt while at the same time expanding public services and creating additional jobs and services.
The deficit is an annual figure and it is simply the difference between the UK’s public expenditure and its’ revenues. We are as a nation spending more than we earn through tax. It is in many ways like becoming overdrawn in your current bank account. This past financial year, 2009-201, the UK public deficit was just under £160bn. This deficit is added to our total public debt and financed by the government taking out loans. The total public debt which is the cumulative net total of our annual deficits id is now £893 billion and has gone up by £160 billion over the last financial year.
As we mentioned the debt is financed by the government taking out loans. This is done by issuing government bonds which are called in the UK gilts. Investors lend us money in blocks of £100 and in return receive annual interest paid in two equal instalments. Ironically over half the government bonds are held by our pensions and insurance funds. So we are bailing them out in two ways: through cuts and our deferred wages (pensions and insurance funds). These loans mature on set dates when we must repay the investor the original £100. The length of the loans varies from 2 years to 50 years. A short loan means we incur low interest rate charges but must find the money quickly to repay the loan. Longer dated loans mean we have longer to find the money to repay the loan but mount up large interest charges.
So we have taken out loans – issued government bonds – on our £893 billion total public debt. The average maturity of our loans is 14 years which means that on average every 14 years we must either repay the £893 billion or take out a fresh loan for £893 billion. In reality we can only reduce the debt if we bring in more money than we pay out. This has only happened for three years in the last 23. This means that our debt will increase continually but we will be faced with large annual interest payments to service it. The average annual rate of interest that we are paying on government debt is around 4% which means that annually as a country we are paying our lenders nearly £40 billion on interest alone.
We face therefore, face three problems financially in dealing with our debt: paying huge amounts of annual interest; finding new lenders to finance each year’s deficit and rolling over our loans while we are still running up annual deficits.
Our total debt has nearly doubled since the onset of the financial crisis in 2007. In that period we have spent £375 billion excluding financial interventions in bailing out the financial system - £175 billion in direct bailouts and another £200 billion on something called quantitative easing where we have printed money and used it to buy assets from financial institutions so that they have more working capital (cash). The cost of this has been spread over four financial years.
At the same time our income has gone down as tax receipts from companies and individual have decreased on the back of the worst recession since the Second World War, a recession induced by the crisis in the financial system. Correspondingly, social security payments have gone up as real unemployment has increased dramatically during the recession.
All the major parties answer to this crisis is to make us pay for this crisis by taking pay cuts, making people redundant and cutting public services. They are proposing to do this to cut the annual deficit. There is also slight increase in taxation planned through the increase in national insurance and the fact that they have not put the tax allowances up in line with inflation which is running at about 4% a year – these measure hit the less well off hardest of course.
The alternative is to make the rich, wealthy and the banks that caused the crisis pay for it. To reduce the debt we would take the banks under full control and ownership. UK banks have $560billion in capital (cash) and £5 trillion in assets. We would use some of this money to reduce the debt dramatically. This would mean we would be paying a lot less in interest payments on our public debt loans. With another part of the money we put this in to a national enterprise fund to create jobs based on socially useful projects – an example would be a nationally integrated free public transport system; this would as well as providing a green public service would create hundreds of thousands of jobs in engineering, construction and in serving and running the system. Many of these could be youth apprenticeships to get our young trained and working again. An additional benefit is that the revenues from all these extra people working rather than being unemployed would reduce the annual deficit.
We would reduce the annual deficit by increasing the tax on the rich, wealthy and corporations and by reducing defence expenditure. Here are the savings that progressive tax measures could make:
One off Savings (in addition to those from full control of the banks):
10% wealth tax on Britain richest people to reduce total debt £35billion
Annual savings:
A progressive wealth tax hitting the 20% wealthiest people £70 billion
Clampdown of tax avoidance of the rich and corporations £20 billion
Increasing corporation tax to 50% from 28% £50 billion
Decrease in military expenditure £40 billion
Annual Total Savings £180 billion
Yes it all seems a bit rationale but we have to fight to make this approach the alternative to the irrational one of all the main political parties which is to make the people who had no responsibility for the crisis pay for it.