Please explain "The deficit" to me?
Discussion
It's a very big question actually...
As simple as I can make it:
If tax revenue = 1Bn
Commited Spending = 2Bn
Then there is a structural deficit of 1bn.
Where does this extra money come from? Well, investors. The government borrows from the markets to cover the difference by issuing bonds for long term debt, and i believe other shorter term instruments to cover shorter term cash flow.
The bonds are for a fixed term (apart from some random bonds that were issued to fund the war that don't have a redemption date) at the end of which the bond holder is paid the stated value of the bond. In addition the bonds pay a coupon, or periodic interest payment to the bondholder.
All here:
http://en.wikipedia.org/wiki/Bond_(finance)
Uk government debt is referred to as "gilts" rather than bonds but it's basically the same thing:
http://en.wikipedia.org/wiki/Gilt-edged_securities
As simple as I can make it:
If tax revenue = 1Bn
Commited Spending = 2Bn
Then there is a structural deficit of 1bn.
Where does this extra money come from? Well, investors. The government borrows from the markets to cover the difference by issuing bonds for long term debt, and i believe other shorter term instruments to cover shorter term cash flow.
The bonds are for a fixed term (apart from some random bonds that were issued to fund the war that don't have a redemption date) at the end of which the bond holder is paid the stated value of the bond. In addition the bonds pay a coupon, or periodic interest payment to the bondholder.
All here:
http://en.wikipedia.org/wiki/Bond_(finance)
Uk government debt is referred to as "gilts" rather than bonds but it's basically the same thing:
http://en.wikipedia.org/wiki/Gilt-edged_securities
http://en.wikipedia.org/wiki/List_of_countries_by_...
Anybody else concerned about this? I mean... what are the future implications of this?
(yes... you will need to scroll down to the bottom)
Anybody else concerned about this? I mean... what are the future implications of this?
(yes... you will need to scroll down to the bottom)
To put it into words anybody can understand:
We're spending more than we earn, so every month we're borrowing a bit more (the deficit). So the interest payments are getting worse and worse.
The vicious circle is that maybe we can't borrow more, unless we get credit cards with a higher interest rate. So the interest will be even higher, and we'll get even deeper into debt.
Reducing the deficit is slowing down the rate at which we're getting deeper into debt. If we can eliminate the deficit by 2015, we can then focus on repaying the debt.
The only thing UK has that Mr&Mrs X don't is we can devalue the £, so what we owe to foreigners is worth less. But imports will cost more... that's like... just about everything you buy. Except every other country will do the same.
PS:
We're spending more than we earn, so every month we're borrowing a bit more (the deficit). So the interest payments are getting worse and worse.
The vicious circle is that maybe we can't borrow more, unless we get credit cards with a higher interest rate. So the interest will be even higher, and we'll get even deeper into debt.
Reducing the deficit is slowing down the rate at which we're getting deeper into debt. If we can eliminate the deficit by 2015, we can then focus on repaying the debt.
The only thing UK has that Mr&Mrs X don't is we can devalue the £, so what we owe to foreigners is worth less. But imports will cost more... that's like... just about everything you buy. Except every other country will do the same.
PS:
BMWBen said:
...instruments...
Always makes me smile, I wonder why they're called that? What do they sound like?-Pete- said:
Reducing the deficit is slowing down the rate at which we're getting deeper into debt. If we can eliminate the deficit by 2015, we can then focus on repaying the debt.
There are no plans to do that.Sooner or later we will default on our debt as will most of the Western World and Japan.
Someone very stupid may say "But if that happens we won't be able to borrow again" at which point I'll mention that Mexico just got away with a 100 year bond paying 6%.
Edited by Fittster on Thursday 21st October 23:22
Looking at the BBC site it said we are spending £149bn more than the goverment is collecting. Was the £149bn figure before all the cuts? so now its like £60bn or after?
And the charts on sky news ( and other sites ) show the main goverment incomes such as
- VAT
- Income Tax
- National Insurance
- Local Tax ( council )
- Road tax
I think i may have missed a few but not one site has mentioned FUEL DUTY. I mean what does the fuel duty pay for? After filling up with £40 where does the £15 or so fuel duty that i have paid go?
And the charts on sky news ( and other sites ) show the main goverment incomes such as
- VAT
- Income Tax
- National Insurance
- Local Tax ( council )
- Road tax
I think i may have missed a few but not one site has mentioned FUEL DUTY. I mean what does the fuel duty pay for? After filling up with £40 where does the £15 or so fuel duty that i have paid go?
Pageo said:
Looking at the BBC site it said we are spending £149bn more than the goverment is collecting. Was the £149bn figure before all the cuts? so now its like £60bn or after?
I believe that the £81bn of cuts announced yesterday are the total effect over the next 5 years. The rest of the gap will close over time due to either the economy growing which increases tax incomes or by freezing other areas of expenditure.Pageo said:
And the charts on sky news ( and other sites ) show the main goverment incomes such as
- VAT
- Income Tax
- National Insurance
- Local Tax ( council )
- Road tax
I think i may have missed a few but not one site has mentioned FUEL DUTY. I mean what does the fuel duty pay for? After filling up with £40 where does the £15 or so fuel duty that i have paid go?
There is a similar chart in the June budget report which has a combined sum of excise duties. Fuel duty is included in this figure along with tobacco, beer, spirits etc. There is a detailed breakdown in the appendix.- VAT
- Income Tax
- National Insurance
- Local Tax ( council )
- Road tax
I think i may have missed a few but not one site has mentioned FUEL DUTY. I mean what does the fuel duty pay for? After filling up with £40 where does the £15 or so fuel duty that i have paid go?
Income Tax £140bn
National Insurance £96bn
VAT £70bn
Corporation Tax £36bn
Fuel Duty £26bn
Tobacco £9bn
etc.
Thankyou4calling said:
Can someone explain the UK deficit to me fairly simply? Who do we owe the money too, how do we pay it off, what happens if we dont. Over what time period will it be rePlease explain paid, what is considered an acceptable deficit, what has it been previously etc.
Generally an acceptable deficit during a recession is one sufficiently small that you get a corresponding surplus when the good times return, so the overall national debt doesn't get any bigger in the long term.Having no deficit at all during bad times can be argued (and was by Keynes) to make matters worse because government spending tends to stimulate the economy. More recently some economists have suggested that government borrowing and spending simply 'crowds out' private spending so makes little real difference.
The issue at the moment is that government spending is so high that we will still have a deficit during the next boom.
Dr Jekyll said:
The issue at the moment is that government spending is so high that we will still have a deficit during the next boom.
^^
^
This, is where Labour have done so much damage. This is what everyone in th UK needs to know. Surely it could be explained, spoonfed to the masses, in terms simple enough that even a knuckle-dragging union spokerperson could understand (but likely still deny) the basic facts.
I'll try: The UK was akin to a contractor who, in the good times, not only didn't save for the day when work dried up, but also ran up huge debts.
ralphrj said:
..
Income Tax £140bn
National Insurance £96bn
VAT £70bn
Corporation Tax £36bn
Fuel Duty £26bn
Tobacco £9bn
etc.
VAT, fuel duty, tobacco tax are all spending taxes & Corporation tax is for companies.Income Tax £140bn
National Insurance £96bn
VAT £70bn
Corporation Tax £36bn
Fuel Duty £26bn
Tobacco £9bn
etc.
Never have understood why national insurance is identified separately when it's just another form of tax on income. It's just to kid us we pay a lower rate of % tax than we really do.
The government doesnt borrow any money.
They create it.
Then its mopped up with gilts aiming to control the money supply and interest rates etc.
http://pragcap.com/mmt-101
"The govt is not a household or a state. It does not finance spending via revenues or debt issuance. The US govt, as a monopoly supplier of currency in a floating exchange rate system simply spends. Think of the US govt as an alchemist. The alchemist can create as much gold as she pleases (from nothing) in order to buy up productivity and satisfy the growing monetary demands of the people she supplies currency to, but she has to be very careful not to debase her gold (you’ll notice that our trusty alchemist is female in this example as males have proven throughout history that they are not trustworthy overseers of government money). Most importantly, there is no solvency risk for the alchemist – only a pseudo form of default via currency collapse (hyperinflation). The alchemist only debases her gold when she issues an amount of gold that is in excess of productive capacity (inflation).
The USA does not finance spending via the bond markets. The USA issues bonds as a form of controlling the Fed Funds rate. It’s a pure monetary operation that is designed to help control the money supply in the banking system. It is not a fiscal financing operation. The USA issues bonds to maintain the money supply by controlling the overnight rate and control excess reserves. People think this is government debt because Congress mandates the issuance of bonds. Much of this confusion is derived from the gold standard in which government’s were revenue constrained. The Euro system, which is also a single currency system (like the gold standard) adds significant confusion to the current environment and is often confused as a flaw in fiat money. In reality, the Euro proves why single currency systems are inherently flawed."
They create it.
Then its mopped up with gilts aiming to control the money supply and interest rates etc.
http://pragcap.com/mmt-101
"The govt is not a household or a state. It does not finance spending via revenues or debt issuance. The US govt, as a monopoly supplier of currency in a floating exchange rate system simply spends. Think of the US govt as an alchemist. The alchemist can create as much gold as she pleases (from nothing) in order to buy up productivity and satisfy the growing monetary demands of the people she supplies currency to, but she has to be very careful not to debase her gold (you’ll notice that our trusty alchemist is female in this example as males have proven throughout history that they are not trustworthy overseers of government money). Most importantly, there is no solvency risk for the alchemist – only a pseudo form of default via currency collapse (hyperinflation). The alchemist only debases her gold when she issues an amount of gold that is in excess of productive capacity (inflation).
The USA does not finance spending via the bond markets. The USA issues bonds as a form of controlling the Fed Funds rate. It’s a pure monetary operation that is designed to help control the money supply in the banking system. It is not a fiscal financing operation. The USA issues bonds to maintain the money supply by controlling the overnight rate and control excess reserves. People think this is government debt because Congress mandates the issuance of bonds. Much of this confusion is derived from the gold standard in which government’s were revenue constrained. The Euro system, which is also a single currency system (like the gold standard) adds significant confusion to the current environment and is often confused as a flaw in fiat money. In reality, the Euro proves why single currency systems are inherently flawed."
V88Dicky said:
The UK is in about 1.4 TRILLION of debt.
To give you an idea of what a trillion pounds look like, below is a diagram of a trillion US Dollars in $100 bills (so in £50 notes, it would be twice as much)
Notice the little man on the front left of the money.
I like it when things are explained using pictures To give you an idea of what a trillion pounds look like, below is a diagram of a trillion US Dollars in $100 bills (so in £50 notes, it would be twice as much)
Notice the little man on the front left of the money.
I think of it like this:
When he was Chancellor, Gordon Brown took out a Capital One credit card.
When times were good, instead of paying off his credit card balance, and spending real cash for things, he continued using his Capital Card, only paying off the minimum 2.5% monthly payment.
Which is fine when times are good, but when times are bad, and you cant afford a the minimum payment even, interest and charges get added on at a dissproportionate rate. this is in effect the defict now, due to poor managment in the past, we cant afford to service the interest on the debt, let alone the debt itself.
When he was Chancellor, Gordon Brown took out a Capital One credit card.
When times were good, instead of paying off his credit card balance, and spending real cash for things, he continued using his Capital Card, only paying off the minimum 2.5% monthly payment.
Which is fine when times are good, but when times are bad, and you cant afford a the minimum payment even, interest and charges get added on at a dissproportionate rate. this is in effect the defict now, due to poor managment in the past, we cant afford to service the interest on the debt, let alone the debt itself.
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