Budget 2014 / 15

After the budget I thought it would be a good idea to try and get to grips with UK government income and expenditure, with particular reference to how it relates to the deficit, and, level of UK sovereign debt. This is my first stab at the process, and, my goodness I can tell you my head is spinning. I feel I have only just scratched the surface, so bare with me. I can only cover so much at a time, plus, although I believe the data is freely available, finding it is another matter entirely. The main information used in this article is from the HM Treasury Budget 2014 book published on 19th March, 2014. It spans a massive 120 pages, and uses 121 different abbreviations, which are detailed in an appendix. I presume this is the booklet that is a succinct summary for use by the “hardworking” individuals as a précis of the main points of the budget?

A good starting point is to provide a summary of the 2014-15 budgets for the income and expenditure.

	£' billion		%
Expenditure
Social Protection	222		30%
Personal Social Services	31		4%
Health	140		19%
Transport	23		3%
Education	98		13%
Defence	38		5%
Industry, Agriculture & Employment	17		2%
Housing & Environment	25		3%
Public Order & Safety	32		4%
Debt Interest	53		7%
Other	53		7%
Total Expenditure		732
Income
Income Tax	167		26%
National Insurance	110		17%
Excise Duties	47		7%
Corporation Tax	41		6%
VAT	111		17%
Business Rates	27		4%
Council Tax	27		4%
Other	118		18%
Total Income		648
Deficit (Borrowing required)		84

From the above figures, it can be seen that the UK government is spending £732bn, but only expecting to receive £648bn income.  The difference is known as the deficit, and, equates to £84bn, or, 11% of the sum required to finance the expenditure.  To obtain this amount the government issues debt instruments (normally gilts), which are purchased by companies, or, other foreign governments, who in return receive interest.  You can see within the expenditure figures debt interest is currently £53bn, representing 7% of spending.  This includes interest we are paying on debt that has been issued in past years.  The thing to remember about the deficit is that it relates to one year only.  The amount of the borrowing in this financial year is added to the debt from previous years, and, hence if a deficit is maintained each year the debt total keeps on rising.  One more thing to bear in mind is the fact that although £84bn is forecast to be borrowed in 2014-15, this only relates to the day to day spending required to keep the country running.  In addition the government may decide to embark on infrastructure projects, for example roads, rail, etc.  It may shock you to learn that the government does not have a savings account set aside to dip into, no, surprise, surprise, it has to borrow more to finance these schemes, and, hence, increase the total amount of debt, and, the amount of interest we will have to pay in the future.

This brings us the amount of UK debt.  The Office for budget responsibility (OBR) provided the following information:-

Financial Year		2013-14	2014-15	2015-16	2016-17	2017-18	2018-19
March 2014 debt forecast (£' bn)		1,258	1,355	1,439	1,497	1,530	1,548
Nominal GDP centred end of March (£' bn)		1,688	1,754	1,827	1,913	1,999	2,088
Debt as a percentage of GDP		74.53%	77.25%	78.76%	78.25%	76.54%	74.14%
Debt per head of population (63.7m)  (£)		19,749	21,272	22,590	23,501	24,019	24,301

From the above it can be seen that the forecast for the debt outstanding at the end of the 2013-14 financial year is £1,258 billion (also known as £1.258 trillion).  As you can see the debt is forecast to increase every year until 2018-19, when it will be £1,548bn, an increase of 23% over five years.  Now this is where I have to admit to my own shortcomings in understanding the relationship between debt and Gross Domestic Product (GDP).

According to the definition GDP is the market value of all officially recognised final goods and services produced within a country in a year.  From this definition I can see that if GDP increases, then theoretically VAT receipts will increase, and, maybe corporation tax, but is it enough to measure net debt against GDP?  I am undecided at the moment as I need to do some more research.  After the budget, a number of commentators were quoting that from 2016-17 debt would start falling as a percentage of GDP.  This is true, but I feel it is somewhat misleading as on the face of it (to idiots like me anyway), it gives the impression that UK public debt is falling, but as can be seen from the table this is not true, as the debt keeps on rising to 2018-19.  I have included in the table debt per person (based on the ONS latest estimate of the UK population of 63.7m as at mid 2012).  As you can see at the end of this financial year each person has £19,748 of debt, rising to £24,301 at the end of 2018-19.  Now tell me exactly how GDP has helped us to reduce the amount of debt we owe?

As I stated earlier this is my first try at understanding the concepts and numbers, so for now I am going to leave it there, and, have a think.  It feels maybe, that I need to analyse past data to see if I can detect any trends that will help my understanding of how measuring the percentage of debt to GDP is going to help solve our problems.  Any ideas you may have or point me in a direction you feel may help me will be appreciated.