Deficit vs Debt

  • 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

  1. Deficit relies to the annual borrowing requirement of the government. (often referred to as budget deficit)
  2. 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)

Official titles

  • 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