Cutting through debt confusion

In: Uncategorized

10 Sep 2012

Confusion has consequences. The willful attempts by politicians of all parties to mislead the public on key economic indicators makes it hard to engage in a sensible debate.

One of the key areas of muddle was subject to a surgical dissection in a new report by the Centre for Policy Studies (CPS). The conservative think tank did a good job in cutting though the perennial conceptual confusion between the government’s debt and its deficit. Although this might sound to some like a pedantic distinction it is central to understanding the debate about economic policy.

With apologies those who are expert in such things, and that probably includes many readers of this site, let us start from first principles. The deficit is the amount that the government borrows in a given year while the debt is the total amount it has borrowed.

It is therefore quite possible, and indeed often happens, for deficits to fall while debt levels rise. Yet you would not know it from listening to many statements by politicians.

For those still finding it tricky the analogy with mortgages and home ownership should help. The deficit is broadly akin to the amount being borrowed each year while the debt is equivalent to the total mortgage outstanding. There is also a good two and a half minute video on the CPS that makes the distinction clear.

Those who believe the distinction is obvious would do well to ponder the way political leaders routinely mislead the public on this matter. Take David Cameron’s response to criticisms by Ed Miliband, the Labour leader, in prime minister’s questions last Wednesday. According to Cameron his opponents “only answer to a debt crisis is to spend more, borrow more, and put up the debt”.

Assuming for a moment that the prime minister’s criticism of Miliband is correct it still gives a misleading impression. Most people would draw the conclusion from Cameron’s remarks that the government is decreasing debt but that is not true. Either Cameron does not understand the distinction himself, which is unlikely, or he is carefully choosing his words to skew the debate.

As the CPS shows the official national debt is projected to rise not only in nominal terms – that is unadjusted for inflation – but as a proportion of GDP. Debt is forecast to grow from 52.5% of GDP in 2009/10 to 76.3% in 2014-15.

Not that Cameron is uniquely misleading in his statements on this matter. Other leading Conservatives have done the same as have Liberal Democrats as well as, when in office, senior Labour party figures.

Under such circumstances it is hardly surprising that the public is confused. In poll results incorporated into the CPS report 47% of the public incorrectly assumed that official debt would fall by about £600 billion by the end of this parliament. Only 10% correctly identified that debt is projected to increase by that amount over the period in question.

It is true that the deficit has fallen since the government came into office but this is largely a result of cuts in investment spending and tax increases. Yet the government continues to give the impression that it is increasing the amount invested in infrastructure projects.

It is no wonder that people are so cynical about politicians when they insist on misleading the public in this way.

This post first appeared on the Fundweb site.