Imagine I own a house worth £100,000. Currently my mortgage is around £45,000.
Imagine I also own a small business which is fundamentally sound, but which is experiencing cash flow problems.
I need some cash to invest in some new machinery.
So, I ask the bank manager for an additional £45,000 secured on my home.
I can meet the repayments, and over the medium term I’ll be able to repay some of the capital too.
The bank manager agrees – he knows that if his bank doesn’t get their regular payments and they have to foreclose and sell the house, they’ll get their money back. The mortgage may have doubled – from £45,000 to £90,000, but it’s still only 90 per cent of the available security.
I use this example to try to make the telephone numbers of budget deficits and national debt just a little more understandable.
Here’s what’s happening.
The UK is borrowing a lot more this year, for similar reasons to the example I quoted above.
Tax revenue such as that received from stamp duty on house sales is down. More money is being paid out because of the increase in the number of jobless. And we continue to invest in the future.
With private house-building in the doldrums it’s essential that we keep up public sector construction projects – on roads, schools, heath centres, etc.
So the “budget deficit” – the difference between what we spend, and what we receive in tax, is rising. It was around 2.5 per cent of our nation’s income [Gross Domestic Product or GDP] in 2007/08.
It’s more than doubled to around six per cent in 2008/09 and is forecast to peak in the current financial year at just over 12 per cent of GDP – around the same share as the United States.
Does that mean, however, that having as it were doubled our national mortgage the UK will be out of line with other major economies, or worse we’ll be facing a ‘debt crisis’? ‘No’ to both. Here’s why.
We went into the world financial crisis with a national debt – the total size of our national mortgage – lower than others.
According to the IMF, general government gross debt in the UK stood at approximately 44 per cent of GDP in 2007. France and Germany were both on 64 per cent, the United States on 63 per cent, Italy on 103 per cent, and Japan on a whopping 188 per cent.
And independent forecasts predict that we’ll stay in line with other major economies in five years’ time.
So we are not out of line with other major nations, but in step with them – or better. We also know from our history what happens if nations act too quickly to cut their deficits – millions more get thrown out of work, and it takes much longer to recover. This is precisely what happened to East Lancashire in the 1930s. It took a decade and a world war to get anywhere near to full employment.
I’m not suggesting, by the way, that a nation’s economy works in the same way as a family budget. But the comparison I offer is valid, and illustrates that – without underestimating the difficulties we all face – the end of the world is not nigh.