- The UK has one of the highest public sector deficits in the EU.
- The UK has one of the lowest public sector debts in the EU.
- To an extent both are true. The UK’s deficit is one of the highest at around 12% of GDP.
- Many EU countries have higher levels of public sector debts. See: List of national debt by country
Definition of Deficit and Debt
- Deficit relies to the annual borrowing requirement of the government. (often referred to as budget deficit)
- Debt related to the total level of public sector debt built over previous years. (often referred to as national debt)
- In 2010/11 UK public sector deficit is forecast to be around £149bn of or 12% of GDP
- In 2010 UK public sector debt is around £870bn or 58% of GDP (Excluding the financial sector interventions)
- Public sector net borrowing (PSND) – annual borrowing requirement
- Public sector net debt (PSND) – total debt levels
Which is most important?
Both are important. Markets will look at both annual deficits and total public sector debt in determining credit worthiness of an economy.
- A high public sector borrowing requirement means there will be a rapid increase in total debt. Markets may feel this rapid increase in debt means the government may struggle to keep up and meet interest payments.
- However, a low public sector debt give a government more room for maneouvre.
Markets will also look at:
- Average maturity of government bonds – how soon do government have to refinance debt?
- How much debt funded by oversees?
- What are forecasts for economic growth and future tax revenues?
Another potential confusion is between a budget deficit (government spending greater than tax revenues) and the trade deficit (imports greater than exports) See: Government debt and trade deficit