I recall being at a panel event given by a think tank a few years back in which a journalist from a well known newspaper asked about how quickly George Osborne was shrinking the debt. One of the panellists, an economist, told the journo that Osborne isn’t shrinking the debt, nor is even trying to – he’s simply attempting to shrink the deficit. The man who asked the question looked stunned. I took it from his look that the difference between debt and deficit, never mind what debt to GDP ratio means, was not something he grasped. Given what Ed Balls said yesterday, I think he’s hoping most of you out there don’t know what any of these terms actually mean either.
Let’s run through this quickly: the deficit is the amount of money a country spends minus what it has taken in (if there is a deficit, by definition the amount of money in has been less than the amount of money out). So if the government raises £160 billion in tax and spends £180 billion, then the deficit for that year is therefore £20 billion.
Debt, on the other hand, is what the country owes in total. So basically, add up the deficit of every year the country has existed, minus any surplus years if they have ever occurred, and that gives you the debt. So beware when any party says they plan to lower the debt – the only way to do that is by running a surplus, in other words eliminating the structural deficit entirely, and then using the surplus to pay down the debt. Many a politician likes to talk about lowering the debt because that sounds so much better than what they are actually planning on doing, which is to simply lower the amount at which the debt is increasing a bit – and sometimes they aren’t even planning to do that.
This brings me to Labour and Ed Balls discussion on this topic yesterday. Ed Balls told radio listeners that the Labour Party intends to eliminate the deficit by 2020 and talked about the “debt falling”. This is classic Balls – what he actually means is that Labour plans to have the debt to GDP ratio fall. This is a very different thing. What Balls intends to do is simply have the debt rise more slowly than the economy grows, which if the economy is growing at all is not terribly ambitious. But what he actually said in English words was that Labour would have the debt fall and that the deficit would be eliminated under Labour by 2020.
In fairness to Balls, he’s not the first nor will he be the last politician to try this one on. Discussions about economics in Westminster tend to be pitched at a level in which it is assumed that most listeners don’t understand even the basics of economics (which in fairness, they usually don’t), and so the terms are simply twisted to fit whichever party’s agenda. Sadly, short of everyone in Britain suddenly becoming much more astute about how macroeconomics works, I don’t see an immediate solution to the problem. But buyer, beware – next time a politician talks about bringing down the debt, look into the detail.