Debt Vs Deficit – Putting Visuals To The Numbers

Paul Parkinson puts the UK’s economic numbers into visual form

The general public has to contend with not only politicians, whether deliberately or ignorantly, misusing the terms “debt” & “deficit”, but also with the relevant monetary figures being so large that they might as well be telephone numbers.

National Debt

The UK National Debt comprises all the current outstanding Gilts which have been issued over previous years by the UK Government to finance its spending; their face-value is, approximately, £1.2 trillion.  To put this figure into perspective, if you laid £1.2 trillion worth of £10 notes end to end, you would have enough, not just to stretch from Planet Earth to the moon and back, but to repeat that stretch a further 21 times; alternatively, if you would prefer to stretch the £1.2 trillion worth of £10 notes in a straight line, rather than 22 return trips to the moon, you will get at least 1/8th of the way to the Sun with that amount of £10 notes (providing you & the money could both withstand the heat!).

Deficit

The Public Sector Net Cash Requirement, or “Deficit”, is the additional borrowing needs of the UK Government when its spending exceeds its income in any given financial year. This is estimated to be approximately £120 billion for the fiscal year 2013/14: upon issuance of the gilts to fund that borrowing, that will then also be added to the National Debt,  Again, to put the Deficit into perspective, if you wished to transport £120 billion worth of £10 notes, you would need a fleet of 52 articulated lorries to carry it in their trailers. It would be a hijacker’s dream come true!

Interest

This is the money the government has to pay to service the National Debt but on an interest-only basis; there is no element of capital repayment built into the annual interest payments.

Imagine a £100,000 mortgage over a 25 year term and an interest rate of 5% fixed throughout.  On an interest-only basis, the interest payments would be £417 pm,  amounting to a total of £125,000 over the 25 years; however the £100,000 borrowed would be still outstanding after 25 years.  In contrast a repayment (capital & interest) mortgage on the same terms would be £585 pm, but the total repaid in both interest & capital over the 25 years would amount to £175,377.Bank_of_England_(1)

For the 2013/14 tax year, the UK Government has budgeted paying £51 billion of interest on its current issued debt.  The amount of interest payable during just 2 hours 6 minutes would equate to a stack of £10 notes as tall as The London Eye; after only a further 21 minutes during which interest continues to be paid, the stack of £10 notes would reach the top of Blackpool Tower!  Over the full year, that stack of £10 notes would stretch through all the lower layers of Earth’s atmosphere to reach into the exosphere which is the final stage before entering outer space (see chart below)   That assumes of course that someone could physically stack such £10 notes neatly at a rate of 160 every second nonstop for the whole year; perhaps it’s  just as well that such debt is created electronically rather than physically!

Conclusion

Since the UK Government is adding to the National Debt, via its annual Deficit, at the rate of approximately £3,800 every second, the likelihood of the National Debt being reduced even slightly in the foreseeable future is extremely remote, to say the least. There are some economists who advocate even more Government borrowing, to enable spending to “stimulate” the economy on the basis of it being self-financing via “fiscal multipliers”.   There may well be academic theories which support such “perpetual motion” debt-financed economic activity, but I remain to be convinced as to its efficacy, especially when one looks at how Gross Domestic Product, Government Income and Government Expenditure are all calculated.

 

 

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