UK Budget Deficit

  • Definition of budget deficit: The budget deficit is the annual amount the government has to borrow to meet the shortfall between current receipts (tax) and government spending.
  • Related concept – National debt or public sector net debt. This is the total amount the government owes. This is accumulated over many years. See: UK national debt (currently £1,100 bn – 73% of GDP)

In 2011/12

  • Government net borrowing was £121 billion (7.9% of GDP)
  • Public sector net receipts (mostly tax revenue) was £572.6 billion
  • Public sector total managed spending was £ 693.6 billion.

government-net-borrowing-2000-15

note this graph includes sale of Royal Mail which temporarily reduces borrowing in 2012-13

 Government borrowing in 2012/13

  • The current budget deficit is forecast to be £ – 89 billion. (5.7% of GDP)
  • The net borrowing level is forecast to be £120.9 bn (excluding Royal Mail and AFP transfers. The headline figure is £ 80 billion (5.1% of GDP)

 

 

Some additional notes

  • (net borrowing is the current budget plus including net investment. Net borrowing is considered the main figure for the government deficit
  • In 2012/13, public sector net borrowing and public sector current budget deficit were reduced by £6.4bn as a result of cash transfers from the Bank of England Asset Purchase Facility Fund to Government. (i.e. profit from Q.E)
  • In 2012/13, public sector net borrowing and public sector net investment were reduced by £28bn as a result of the transfer of the Royal Mail Pension Plan.
  • In February 2013 public sector net borrowing was reduced by £2.3bn as a result of proceeds from the 4G spectrum auction.

Record budget deficits in 2009/10 recession

Net borrowing reached a peak in 2009/10 with £167.4bn. This was due to:

  • The financial crisis which led to falling tax revenues
  • Expansionary fiscal policy including VAT cut
  • Higher spending on unemployment benefits during the recession.
  • Long term spending commitments, e.g. government spending increases in the early 2000s.

UK Budget Deficit – net borrowing % of GDP

borrowing-percent-gdp-exclude-royal-mail

Note, this excludes Royal Mail sale and AFP Transfers and is more accurate reflection of underlying deficit.

budget-deficit-uk-percent-gdp

Source: Public Sector Finances at HM Treasury | Public Sector Finances at ONS

UK Budget deficit history

borrowing-percent-gdp-69-14

 

UK Budget deficit in 1920s

1913-38-UK budget-deficit

 

 

Important Terms related to UK budget deficit

  • Cyclical budget deficit. A cyclical budget deficit takes into account fluctuations in tax revenue and spending due to the economic cycle. For example, in a recession, tax revenues fall and spending on unemployment benefits increases.
  • Structural deficit. This the level of the deficit even when the economy as at full employment.
  • Primary Budget Balance – A primary budget balance means we take away interest payments on debt. (Primary budget deficits of EU) For example, if the budget deficit is £119bn, but we spend £42bn on interest payments, the primary budget deficit will be £77bn.
  • Current budget. The current budget is a summary of net cash flows at that particular time.
  • Net borrowing. Net borrowing includes net investment and is considered to be the main deficit figure.

 

Factors that affect the size of the budget deficit

1. Economic cycle. During a recession it is likely that there will be an increase in the budget deficit. This is because:

  • Tax revenues will be lower.
    • less people are working therefore income tax will be less
    • Consumer spending is lower therefore VAT receipts are lower
  • Government spending will increase
    • More will be spent on unemployment and welfare benefits

2. Level of Interest Payments. Higher bond yields will increase interest payments and the budget deficit.

3. One-off Receipts. A governments budget balance may be improved through one off payments, such as receiving income from privatisation of state owned assets.

4. Structural deficit. If the government commit to investing in infrastructure, there will be higher borrowing. For example, higher government spending increased in the early 2000s contributing to an underlying structural budget deficit.

govt-spending-94-12

 

5. Fiscal Policy. Expansionary fiscal policy involves higher spending and lower taxes which will increase the size of the budget deficit.

 

Related Concepts

  • Total debt shows the total amount that the government owe, accumulated over many years. This is referred to as public sector net debt or national debt. See: UK National Debt
  • Don’t get confuse the budget deficit with the trade deficit, this occurs when imports are greater  than exports.

Previous Terms for Budget Deficit

  • PSNCR       Public Sector Net Cash Requirement.
  • PSBR – Public Sector Borrowing Requirement.

Official definition of borrowing Net borrowing can be defined as the difference between total accrued revenue (or receipts) and total accrued expenditure (both current and capital). Net borrowing is an accrued measure which is consolidated (i.e. intra sector transactions are not recorded). ONS sheet pdf

During periods when the public sector revenue exceeds its expenditure then the public sector is able to repay some of its debt rather than borrow further. When there is a repayment the public sector net borrowing is shown as a negative.

 

Monthly Figures for net borrowing

net-investment

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