One of the most interesting things about yesterday’s so-called “Phony Budget” was that all the talk was about paring down the deficit. It’s what Labour wants to focus on. It’s what the opposition parties want to talk about, too. The deficit is the gap between the amount of money spent by the Government and the amount it takes in through general taxation.
But there’s an elephant in the room that Alistair Darling and his counterparts try not to look at, as it’s fast becoming too gargantuan a problem to even comprehend: the ever-rising national debt.
Every year the deficit may go down (and by that, I mean “become slightly less horrendously appalling”), but the national debt will continue to rise. It’s forecast to reach an unbelievable £1.4 trillion by 2015. That’s obviously completely unsustainable. To put this into perspective, Iceland’s near-bankruptcy occurred when its national debt reached $4 billion. Greece is in serious trouble with a debt of €216 billion.
The saving grace for us here is that the measure used by the markets to assess how screwed we are, is to measure the deficit against GDP – not the debt. Here, Iceland’s 25% pushed it off the edge. Greece is hovering somewhere around 12.5%, and is in serious trouble. The worrying thing is that our percentage could get close to Greece in that regard over the next few years. Luckily our gilts market (government bonds) should, in theory, tide us over. But gilts do have to be paid back in the end. Er… and doubtless more of them will be issued to do that. Bit of a vicious circle, really.
Even if we take it that Darling’s forecasts are all correct (a big leap), and the deficit will be halved in four years, that still leaves us with all that debt, which can’t just sit there forever. And what does that mean? Well, quite simply, the public service cuts that everyone knows will happen after the General Election are only the tip of the iceberg. Even if in a decade’s time we miraculously crawl to a surplus rather than a deficit, the pain will have to continue. That $1.4 trillion is going to have to be serviced. Something to look forward to, then.
A small nugget to end with: entry to the Eurozone requires a country’s national debt to be less than 60% of GDP. If in 2015 we have a debt of £1.4 trillion, then at 2008 levels our debt figure would be over 78% of GDP. Which would mean that we couldn’t join the Euro even if we wanted to.
There’s food for thought.