Budget 2010: a beginner's guide to Britain's debt

Budget 2010: a beginner's guide to Britain's debt

The scale of Britain's debt is why George Osborne is delivering an emergency Budget. Here's an expert lowdown on the state Britain is in.

By George Buckley, UK economist at Deutsche Bank

Published: 1:10PM BST 16 Jun 2010


WHAT IS BRITAIN'S DEBT POSITION AND HOW DID IT BUILD UP?


Of all the most highly-rated countries in the world, the UK government's debt position has deteriorated the quickest over the past two years. The government now owes about 70pc of the UK's total annual output, and this figure will rise further over the coming years. The new government is likely to announce drastic measures to address the situation in Tuesday's Budget, but it will take time to stop debt from rising.

IS IT BRITAIN'S HOUSEHOLDS THAT ARE MOST IN DEBT?


The two parts of the economy with the most debt are the government and households. The failure to save in the good times along with the credit crisis, bank bail-outs and the ensuing recession can be blamed for the rise in government debt. The surge in household debt can be attribued largely to higher house prices over the past 15 years. People have had to borrow more as house price increases have outstripped the rate at which they were able to build up savings. Following the recession people have borrowed less, but the process of reducing debt will take time.


WHAT ARE THE DIFFERENT WAYS OF MEASURING BRITAIN'S DEBT?


While the budget deficit is the amount which the government borrows in any one year, it is also important to look at the level of debt. This is the total amount that the government owes because of all of its current and previous borrowing. There are two main measures of debt - gross and net. Gross debt is the total amount of outstanding loans, while net debt takes off the financial assets that the government owns. These figures are reported in a similar to way to borrowing - in other words both in money terms and as a percent of GDP. Currently, gross debt stands at over £1trillion, which is more than 70pc of GDP.


HOW DOES BRITAIN'S DEBT POSITION COMPARE WITH OTHER MAJOR COUNTRIES?


Fortunately, government debt was low (relative to other developed countries) prior to the credit crisis, so we can at least be thankful for that. Debt should therefore settle at a level lower than the average of the G7 countries by the end of this parliament. Debt will be lower than countries such as Italy and Japan, which owe much more relative to the size of their economy than the UK does. But it will probably be higher than Canda and even Spain over the next few years.


WHAT'S THE STRUCTURAL DEFICIT?


The structural deficit is that part of the total shortfall between government receipts and spending that can't be explained by weaker economic growth. When strong economic growth returns, it is the level of the deficit that still remains. The way that this must be tackled therefore is to introduce measures to reduce spending, such as the £6bn of cuts already announced, and/or raise taxes, such as increasing the rate of VAT or capital gains tax.


WHAT'S THE DANGER IF THE DEFICIT ISN'T TACKLED?


The euro area is in crisis because of its huge deficits. A combination of recession and banking sector bail-outs has meant increased government borrowing, with the result that investors have been worried that some countries may not be able to pay them back. In turn, they have demanded a higher rate of interest to compensate them for the increased risk involved in lending governments their money. This is how it can become a viscous cycle - because when interest rates rise it becomes more difficult to pay. The government must therefore address the situation to ensure that the nation's debt is sustainable.


http://www.telegraph.co.uk/finance/financetopics/budget/7831122/Budget-2010-a-beginners-guide-to-Britains-debt.html