Confusing our national debt with the budget deficit is like confusing stock and flow. So when David Cameron said that the Coalition was “paying down Britain’s debts” there was a bit of a fuss. It ended up with Andrew Dilnot, the chairman of the UK Statistics Authority urging politicians to mind their language:
“It is clearly important for all parties to public debate in this area to understand the relevant statistical definitions and to distinguish changes in the level of debt outstanding from changes in borrowing per period, and to reflect these in their communication of the statistical trends involved.”
And yet there is a sense in which eliminating the deficit is tantamount to paying down our debts. Consider the following from Simon Wren-Lewis’s Mainly Macro blog:
“When is a deficit too big? The answer that some would like to suggest is that any deficit is too large, and that we should aim to eliminate the deficit completely. However for economists a more natural reference point given our current position is to ask what level of deficit would keep the ratio of government debt to GDP stable. Public sector net debt, which is the definition the OBR tends to use, is approaching 80% of annual GDP. If the economy grew by 4% in nominal terms each year, then a deficit (‘public sector net borrowing’) of 3.2% of GDP would keep the debt to GDP ratio stable at 80%. (0.04 x 80% = 3.2%.)”
It therefore follows that if the deficit is eliminated altogether, then the national debt – expressed as a percentage of GDP – will fall. This doesn’t, of course, pay back a single penny from the sum actually owed, but it’s the debt-to-GDP ratio that counts when it comes to assessments of national solvency.
Unless GDP is shrinking, the point at which the debt ratio is stabilised comes before the point at which the deficit is eliminated. According to the OBR, the former is expected to take place in the financial year 2015/16:
“In March it expected a cyclically adjusted deficit excluding transfers of 3.4% of GDP for that year. In other words, the government will have just about got us to a position where the debt to GDP ratio is no longer rising, if it implements planned savings and everything pans out as the OBR expects. As a result, the OBR suggests 2015/16 will be the year debt/GDP peaks.”
2015/16 will be the first financial year of the next parliament and, quite possibly, a new government. Whoever’s in charge will be sorely tempted to make a big thing of the peaking of the deficit. Indeed, they may declare that stabilisation is the new elimination.
At the very least, there will be those – like Simon Wren-Lewis – who will argue that stabilisation gives us a bit of leeway:
“The fact that by 2015/16 we will have roughly stabilised the debt to GDP ratio might surprise many people… Are not the papers full of all the additional austerity there is still to come after the next election?
“One reason they suggest that is that all political parties are not content to just keep the debt to GDP ratio constant at 80%. They think this number is too large for the long term health of the economy, and there are a number of reasons why they may be right… But the speed at which debt is reduced is a choice… and not some imperative that must be done or something terrible will happen.”
Certainly, there are choices to be made here. We could, for instance, ease the burdens we’ve placed on the backs of our children and grandchildren – including the debt burden. We could reduce the size of our debts before the cost of re-financing them goes back up again. We could maintain our fiscal discipline in order to inspire international confidence in the British economy.
We could even – as all good Keynesians should – run a budgetary surplus during times of expansion to balance deficit spending during times of recession.