Is it all about the debt for the UK? Are we “living within our means?

One of the features of having a blogging record and career which now stretches beyond the five-year mark is that quite a few subjects have a habit of recurring. Also the way in which they are treated varies usually from not so good to outright manipulation. Today the UK Prime Minister David Cameron has stepped into such an arena with this quoted by BBC News.

When you look at the children you love, do you want to land them with a legacy of huge debts? Do you want to limit their future, to make life more difficult for their generation, because we refuse to do the right thing in our generation?

I say we have a responsibility to act. We can get Britain back to living within our means in a way that is fair and sensible and secure.

This is a subject regularly ploughed by the UK political class and the situation is that the connection between all of their rhetoric and reality is if we choose to be polite rather slim! I will discuss the debt situation in a moment but apart from being rather pejorative the phrase “living within our means” has a litany of alternative definitions. As we stand right now it is quite some way away if you translate it as ending our fiscal deficit by matching our tax and other revenues with public spending.

Public sector net borrowing excluding public sector banks (PSNB ex) from April to November 2014 was £75.8 billion, a decrease of £0.5 billion compared with the same period in 2013/14.

Even in these times where we combine inflated numbers and statistics with recorded disinflation £75.8 billion for the fiscal year so far is no small sum. You may also note that in spite of the economic growth spurt which the UK has in many respect benefitted from the data of the public finances has remained grim with the income tax take in particular being much weaker than you would expect in such circumstances. Also a decrease of £0.5 billion on this time last year would only exhibit an enormously broad definition of trying to leave within our means. According to the Office for Budget Responsibility the state of play is as shown below.

As a result, despite strong economic growth, the budget deficit is expected to fall by only £6.3 billion this year to £91.3 billion, around half the decline we expected in March. That would be the second smallest year-on-year reduction since its peak in 2009-10, despite this being the strongest year for GDP growth.

Some Perspective

Also as the starting gun has been fired for the UK General Election in May some perspective can be gained by the fact that as of the last general election we were supposed to be “living with our means” now or at least on the verge of it. Is it like a Mirage in the distance always a few years away?

Looking further ahead, we expect the deficit
to fall each year and – as in March – to reach a small surplus by 2018-19.

Whereas if we take the advice of Kylie Minogue and step back in time we see this at the time of the June 2010 Budget.

the cyclically-adjusted current budget deficit of 5.3 per cent of GDP in 2009-10 to be eliminated by 2014-15 and reach a surplus of 0.8 per cent of GDP in 2015-16.

Using “cyclically-adjusted” was always designed to mislead but as we are nowhere near it then it does not seem currently quite so important. Also exactly what cycle are we in?

The National Debt

This is one definition of a “legacy of huge debts” so let us examine it. The headline number for the UK is below followed by the forecast at the time of the June 2010 post-election Budget.

Public sector net debt excluding public sector banks (PSND ex) was £1,457.2 billion (79.5% of GDP) at the end of November 2014, an increase of £89.7 billion compared with November 2013.

public sector net debt (PSND) to increase from 53.5 per cent of GDP in 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;

As you can see there are two major differences between the forecasts back then and reality now. Firstly the debt to GDP ratio is approximately 10% higher and secondly it is continuing to rise compared to reaching a peak and then falling. In the meantime there have been some definitional changes (to the levels of debt and GDP) but for today’s purposes I am ignoring those as they do not change the broader picture.

Other National Debt Measures

The UK always looks better than other comparable countries because our headline data is calculated on a more favourable basis than what has come to be considered the international standard. This is very similar to the Eurostat measure and using it allows a more accurate comparison with our neighbours in Europe and it is shown below.

General Government Gross Debt (Maastricht debt) at the end of November 2014 was £1,583.3 billion and General Government Net Borrowing (Maastricht deficit) in 2013/14 was £100.4 billion.

On this basis the UK’s national debt to GDP basis is more like 86.4%.

Also there is a number which includes the bank bailouts which has pretty much only been publicised by me. Rather ironically it has actually been falling for some time now! Indeed it took quite a lurch downwards when Lloyds Banking Group was excluded from the figures as shown below from the official data.

Public sector net debt including public sector banks (PSND) was £2,285.3 billion (125.8% of GDP) in last month’s bulletin. This figure has now been revised down to £1,763.0 billion (97.0% of GDP), a decrease of £522.3 billion, primarily due to the re-classification of LBG to the private sector.

The reclassification of LBG in such a way is not a little farcical as the treatment makes it look as if someone has cried “abracadabra” and “shazaam”.

Whole of Government Accounts

These numbers are somewhat behind the times but the latest report is shown below.

An increase in the net liabilities of government to £1,630 billion from £1,347 billion in 2011-12, driven by an increase in government borrowing, growth in the expected level of pension liabilities (largely due to fall in the discount rate from 2.8% to 2.4%) and in provisions for other
future liabilities;

As you can see as of 2012/13 the number was increasing rapidly and if you look at the quoted fall in the discount rate and look at bond yields around the world now there is plenty of food for thought. Firstly on how any such calculation can have credibility?! However you think of it this number is the broadest definition of the total position as it includes an estimate of and for future pension liabilities for example.

Some Debt Is More Equal Than Others

One area where a completely different official approach has been taken is that of mortgage debt. This has been driven by both the government and the Bank of England. We have had the Help To Buy scheme from the government and the Funding for (Mortgage) Lending Scheme of the Bank of England.Before this started we were reducing our mortgage liabilities but in more recent times net mortgage liabilities have been rising by around £2 billion a month. So we are not trying to live within our means here especially if we compare to growth in real wages over the credit crunch period. As of November 2014 then total mortgage borrowing was £1.294 trillion according to the Bank of England.

There has been an upwards trend in unsecured or consumer credit too which rose by £983 million in November 2014 in net terms and now totals some £18.98 billion.


On today’s journey we have seen the gap between rhetoric and reality. In this instance it relates to the government but in fact all the major political parties play fast and loose with both statistics and reality. Or as PM Dawn put it.

Reality used to be a friend of mine.
Reality used to be a friend of mine
Please don’t ask me ’cause I don’t know why,
but reality used to be a friend of mine.

There are quite a few different definitions of the numbers and the definitions have undergone recent changes. The credit crunch era has done to reality what we would expect should we be in a space ship in the vicinity of a black hole. However there is a dog which has not yet barked in the way that you might imagine and if we go back to June 2010 I can demonstrate why. The cost of our national debt (average  of UK Gilt yields) was forecast to be 5% now whereas even a thirty-year Gilt currently only yields 2.34% so the debt cost may even have fallen in terms of interest to be paid. The catch is that for this to continue it would have to fall continuously.


18 thoughts on “Is it all about the debt for the UK? Are we “living within our means?

  1. expect them to rename and respell debt !

    still with interest rates at an emergency rate of 0.5% why should we be expecting the economy to be motoring along ? Its not rocket science , taxes receipts will not rise when wages are below inflation and companies avoid paying by posting abroad ….

    And our HMG fiddle the GDP figures so masterly they end up paying more to the EU ? WTF?

    Well I suppose if we believe the CPI figure then making cuts of 76 Billion ( from a spend of , what 730 billion ? ) would be easy , after all nothing is inflating away , oh hang a mo , so thats why they’re peeved at dis-inflation ……

    well its interesting times again , but lets not forget anyone who runs a campaign at the general election of we’ll cut everything by 10% isn’t going to get in ……


  2. great article as always Shaun.

    None of the parties have the political will to live within their means. The longer this goes on the worse it gets. I expect the implosion will occur after the election.

  3. Ask if the frugality reaches as far Trident replacement, for aircraft carriers (without aircraft, ffs) or just as far as disability benefits.

  4. Shaun,

    I must be naiive to ask the question but why is Cameron raising the subject. I’ve been surfing with him at Polzeath bay, his kids are quite young, is he geniunely worried about the future of his own kids? Why have they as a govt. boosted the “financialisation” of property, one sure way of robbing the yound and favouring the old. And then there are the real numbers, as clear as day deficit and debt enourmous and growing.

    If this is electioneering, how is the subject meant to work? I posit:

    We the conservatives have been “responsible with money” , our values are something you proletariat can “relate to” (as long as you don’t live in reality).

    Paul C

    • Hi Paul C

      I often wonder how regularly reality impacts on our political class I tend to think that it is not that often! As to the posturing I guess that they think that even though matters have gone badly on the deficit they can put pressure on Labour over it.

  5. Am I alone in finding the Tory road poster eerily reminiscent of Labour’s “The Road Ahead” tv ad from the last election? Weirdly, that ad drawled on about fiscal responsibility and saving the nation from economic ruin, (all thanks to Gorden, eh?) and the Tories opposing Labour’s rescue steps. Quite a flip, if you think about it. Two things strike me. First, if you look at the stats as set out by Shaun above, the Tories have plainly failed in their promises to get rid of the deficit, starkly, indubitably, absolutum obsoletum, failed. They’ve failed on other fronts too, most of what they attempted in fact, but deficit reduction was the raison d’etre of the Coalition, wasn’t it, the great ambition? The first two or three years of rule were marked by cuts and stoicism and GDP flatlined, followed by a surge of Govt borrowing and assorted feverish schemes to promote and allow yet more housing greed. As that calms, we’re starting to see GDP tank again, with the latest forecasts at 0.5 or thereabouts. Who’d be surprised to see it shrink to nothing, given mortgage lending and asking prices are on the slide? And second, the feeble plagiarism of the road motif shows us how bereft of original ideas our politicos are, just as they were exposed as desperate, clueless chumps in the Scot referendum debacle. Where they are exposed to scrutiny, such as these sad efforts, we can see how they flail and squawk as the situation demands. All I can really take from the Tory road ad is that they’ve got nothing left but the same old economic safe hands line, and precious few of us are still left to believe it.

    • A Tory government might have made greater inroads but we ended up with a coalition an compromises had to be made. Unfortunately we are likely to get another coalition this year.

  6. Cameron is genuinely worried! He’s worried about whether he can win the next general election… period.
    In that respect he is like all our career politicians. They have nothing else to actually worry about. Only that they manage to stay on the westminster gravy train just long enough to get a Lordship at journeys end.
    …and because the British Electorate are too dumb to see it, they (and all the generations to come) will deserve the plight that awaits them.
    In May the people will vote for a government that will carry on in the same way governments have carried on since the second world war. Nobody cares because the can has always been kicked that little bit further into the future. Nobody cares, as long as their generation isn’t the one that has to pay. Nobody cares because it isnt their problem. Nobody cares… period.

    Sorry, thats a bit depressing isnt it? 😩

    • Hi Tim

      Is it that nobody cares? Or is it more that people think that to coin a phrase there is no alternative? As I believe in voting I have come to the conclusion that it is time for the option “none of the above ” to go on the ballot paper.

  7. Hi Shaun another great blog. Are we living within our means? Clearly we aren’t as you illustrate.
    The fiscal deficit is miles away from what the OBR advised adding all the time to the national debt.
    David Cameron speaks about not burdening the young with debt today and I know he is speaking about the fiscal deficit and the cost of payment for the National debt which is manageable at present but may not be in the future.
    But the unsecured lending is rising quite rapidly at present and this is ominous.Inexpensive borrowing rates are helping to drive car sales and spending on debit cards are rising.
    If we are really concerned about the younger generation with university debts,high house prices and rising rents steps should have taken earlier but wasn’t.
    Hopefully property prices are beginning to fall.
    Price inflation figures are due and will be watched with interest.As you have mentioned the GBP has fallen against USD and what that holds for the future will unfold in months ahead.
    Pressure on the GBP could go on for some time as election is still some weeks away,
    I believe the Conservatives will win most seats and most probably form a government UU and maybe others.We shall see.

    • Hi Midge and thank you.

      The situation is rather familiar to students of British economic history. The main difference is the disinflationary and reflationary pressure from a falling oil price. There were more oil price falls today so Bank of England Governor Carney looks like he will need plenty of ink for his pen going forwards. Dear Chancellor….

  8. Hi Shaun,
    I envisage a lot of 55 year olds using their freed-up pension cash to pay down their debts, and buy lots of imported goods. Just like the mis-selling compo this little un-earned boost should add to our GDP figures.

  9. All the politicians are guilty of silence and/or deception on inter-generational wealth transfers. The generation who is graduating/ buying first homes now is being heavily taxed, if not outright robbed.

    But it is interesting to ask how the various age groups are affected in the event of an inflationary episode. (As we often discuss Greek default and devaluation).

    My observations from a previous crisis are that most +40 workers and pensioners are very badly affected – though many Brit 40+ workers will have skills allowing overseas jobs, which option wasn’t open to most Warsaw pact country workers. Pensions decimated and near worthless …

    The early career workers and those entering the job market will have whole career prospects blighted (this is an average expectation – not universal)

    Young children may live through a few difficult years, but by the time they enter the job market this crisis is history, and assuming devaluation has reduced debt to manageable proportions they start with a clean sheet.

    Of course there are lots of assumptions here – honest Iceland bounced back quickly from 2008, where Bulgaria recovered slower from 1997. Greece is still a mess after 5+ tough years. And of course, if we could prove the troika team knew their dictates would cause a long depression without noticeable recovery then we should be prosecuting Strauss-Kahn, Lagarde, Juncker, Sarkozy & Merkel etc

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