The deficit, debt and borrowing: An economic jargon buster
Sebastian Chrispin
is a business and economics analyst at BBC News @SChrispin
As the clock ticks down to polling day and the main parties lock horns over how best to tackle the deficit and spur economic growth, it’s probably time for a quick refresher on what they’re actually talking about.
For average politics watchers - let alone the majority of non-specialist journalists who need to understand and interpret what’s being said - it can be hard to keep on top of the economic claims and counterclaims.
Last month the Conservatives said that the government had halved the deficit. They were so sure that they repeated the announcement in an election poster that was predictably pounced on by the press.
The claim only stands up if you look at the deficit as a percentage of GDP. If you look at the deficit in absolute terms, it is down by more like a third. (And sometimes just not mentioning the ‘deficit’ at all gets pounced on as well.)
The discussion around public sector finances is riddled with jargon, but what do some of these familiar economic terms mean, precisely? Here’s a short guide to understanding the basic language:
Borrowing: This refers to how much the government has to borrow to cover the shortfall between what it receives through tax receipts and what it spends. It is sometimes referred to as public sector net borrowing (or PSNB) and is an annual figure. This can cover day-to-day spending as well as money put towards longer term investments.
Budget deficit/surplus: When the government receives more than it spends, it is said to run a surplus. If the government spends more than it receives, it’s said to run a deficit. Simple as that.
Debt: Over time, government borrowing can add up. Public sector debt refers to the amount that the government owes. So public sector net debt (PSND) is like a running total of government borrowing that the government has yet to pay back. Think of it as a culmination of several years of running an annual budget deficit.
Structural: This is a little more complicated. A structural deficit is essentially the annual budget deficit, adjusted to ignore the economy’s peaks and troughs. For example, if a government is running a deficit you might expect that deficit to get smaller as the economy picks up again. What the structural deficit does is try to ignore the effect of this economic recovery. To put it another way, the structural deficit is what is left over when the economy is operating at full capacity. And the structural deficit is potentially problematic if it gets too high. That is because even a better performing economy won’t wipe out the deficit.
GDP ratio: Both borrowing and debt can be expressed in absolute terms. For example, in the financial year to December, public borrowing stood at £86.3bn (down £0.1bn compared with the same period in 2013-14).
The terms can also be expressed as a percentage of gross domestic product (GDP). This can be a useful measure because it puts borrowing and debt in the context of how big the actual economy is.
But it can be confusing if politicians don’t explain how they are using the figure. This is why some commentators criticised the Conservatives for claiming the government has halved the deficit when really it was referring to the deficit as a proportion of GDP.
When discussing issues like the deficit, especially when comparing to earlier forecasts or past performance, it is helpful to make clear what metric is being used.
Spending (capital versus current): When looking at the government’s outgoings, it is worth noting that the government breaks its spending into two parts. Current spending refers to the government’s day-to-day spending needs or things that are used up. Think school books and hospital medicines. Meanwhile, capital spending refers to bigger projects that will last a long time, such as building schools, hospitals and roads.
So that’s it. It’s a start. Let’s save ‘quantitative easing’ (QE) for another day…
Our special section on reporting business and the economy
