debt

Solutions to national debt

Solutions to national debt

Readers Question: Please is there any solution to national/public debt? National (public sector) debt is the outstanding level of debt owed by the government to the private sector. It is the accumulation of annual budget deficits. Do we need a solution? Firstly, it is worth evaluating whether we need an actual ‘solution.’ National debt has been a feature of economies for many centuries. The UK national debt goes back at least to the Seventeenth Century. Source: Reinhart, Camen M. and Kenneth S. Rogoff,…

Effects of a budget surplus

Effects of a budget surplus

A budget surplus occurs when government tax receipts are greater than government spending. It means the government can either save money or pay off existing national debt. It is worth noting, that budget surpluses are quite rare in the past 120 years. Politicians have sometimes attempted to enshrine budget surplus into law but what are the economic effects of this?The argument is that with high levels of national debt – periods of economic growth should be taken as an opportunity to…

UK post-war economic boom and reduction in debt

UK post-war economic boom and reduction in debt

Readers Question: What caused the massive decrease in the debt to GDP ratio for the UK following World War II?It is a good question to ask. In the past few years, many European policymakers have felt that rising debt levels needed panic levels of austerity/spending cuts. But, that didn’t happen in the UK in the post-war period. Summary UK national debt peaked in the late 1940s at over 230% of GDP. From the early 1950s to early 1990s, we see a consistent decrease…

Government debt under labour 1997-2010

Government debt under labour 1997-2010

Government debt under Labour was a major factor in the elections of 2010 and 2015. But to what extent did the Labour government really plunge the economy into debt during 1997-2007? Usually, when people say ‘it’s debt that got us into this mess’. They tend to view all types of debt as the same – equating government debt to financial debt incurred from selling sub-prime mortgages in the US. However, this is deeply misleading. The consequence of bad debt defaults in the financial system is very different to government debt…

Political and economic concerns about deficits

Political and economic concerns about deficits

In the 1960s, a big political issue was the size of the deficit. Not the budget deficit, but the current account deficit on the balance of payments. In recent years, worries about the balance of payments (current account deficit) have slipped from the political and media agenda. However, we have a very strong importance attached to reducing the deficit. It is taken for granted that a government who fails to balance the budget must be doing something very wrong. But, economic theory may take a different view. For example,…

Consequences of budget surplus legislation

Consequences of budget surplus legislation

Readers Question: Can you explain the short-term and long-term effects of Osborne legislating that there must be budget surpluses in any year when growth exceeds 1%, which is almost every year, whilst we have a rather large current account deficit. What will be the effects of this on private sector companies, public investment, households, the current account deficit, pensions and ultimately the banking sector. Running in a budget surplus means government spending must be lower than total government receipts (primarily tax revenues)

Does the UK need a fiscal rule?

Does the UK need a fiscal rule?

Fiscal rules are attempts by the government to limit public sector debt and annual borrowing to certain criteria. For example, a simple fiscal rule might state a government should have maximum annual deficit of 3% of GDP. Alternative, the government may plan to run zero deficit over the course of the economic cycle. Generally, economists are sceptical of fiscal rules – especially those that are lacking in flexibility. The reason is that in economic downturns – with falling private sector spending – public sector debt can provide a counter-balance to…

Is austerity necessary?

Is austerity necessary?

Since 2010, the UK economy has been dominated by spending cuts and a the desire to run a budget surplus as soon as possible. In the political world, the government deficit is often portrayed as the source of many economic ills, and eliminating the deficit one of the highest macro objectives. However the government deficit (see: Government debt under Labour) never caused the recession, but the deficit was largely a symptom of the global financial crisis. Reducing the deficit at a time of weak growth has arguably slowed down…