Tag: Public Sector Net Debt

The Autumn Statement, delivered annually by the Chancellor of the Exchequer in late November or early December, is rather like a second Budget. In his statement, the Chancellor presents new forecasts for the UK economy by the Office for Budget Responsibility (OBR) and announces various policy changes in the light of the forecasts.

So what does this OBR say? Its headline reads, “Government borrowing revised higher as weaker economy hits revenues” and this is followed by the statement:

The OBR has revised up its forecasts for public-sector borrowing over the next five years, as a weaker outlook for the economy reduces tax revenues. As a result, the Government no longer seems likely to achieve its target of reducing public-sector net debt in 2015–16.

The chart shows OBR forecasts for public-sector net borrowing made in June 2010 (its first forecast after the OBR was formed by the Coalition government), in March 2012 and in December 2012. The current forecast clearly shows borrowing set to decline more slowly than in the earlier forecasts. Click here for a PowerPoint of the chart. (Note that the effects of transferring the pension assets of the Royal Mail to the Treasury and the effects of not paying interest to the Bank of England on government bonds purchased under quantitative easing programmes have not been included in order to make the three forecasts consistent.)

So with a weaker economy and slower recovery than previously forecast, what are George Osborne’s options? He and his colleagues, along with various economists, argue for sticking to Plan A. This means continuing with austerity measures in order to get the public-sector deficit down. But with government borrowing having fallen more slowly than forecast, this means further government expenditure cuts, such as reductions in benefits, cuts in grants to local authorities and reductions in pensions relief. Even so, achieving his two targets – (1) eliminating the cyclically adjusted current (as opposed to capital) budget deficit by 2015/16 (the so-called ‘fiscal mandate’), and (2) public-sector debt falling as a proportion of GDP by 2015/16 – will both be missed. They were extended by a year in the Budget last March. They have now been extended by a further year to 2017/18.

The opposition and many other economists argue that Plan A has failed. Austerity has prevented the economy from growing and has thus meant a slower reduction in the deficit as tax revenues have not grown nearly as much as hoped for. A more expansionary policy would allow the deficit to be reduced more quickly, especially if extra government expenditure were focused on infrastructure and other capital spending.

It could be argued that George Osborne’s Autumn Statement moves some way in this direction – a Plan A+. He is making deeper cuts in welfare and government departmental spending in order to divert monies into capital spending. For example, there will be £1bn of extra expenditure on roads; £1bn extra on schools; £270m on FE colleges; and £600m extra for scientific research. Also, by extending the period of austerity to 2017/18, this has meant that he has not had to make even deeper cuts. What is more, he is increasing income tax allowances and cutting the rate of corporation tax by 1% more than originally planned and scrapping the planned 3p per litre rise in road fuel duty. He hopes to make up any lost tax revenue from these measures by HMRC clamping down on tax evasion.

But by sticking to his broad austerity strategy, and with many parts of the global economy having weakened, it looks as if the UK economy is in for several more years of sluggish growth. Winter is going to be long.

Webcasts and Podcasts
Autumn Statement: George Osborne scraps 3p fuel duty rise BBC News, Carole Walker (5/12/12)
Autumn Statement: OBR says deficit ‘shrinking more slowly’ BBC News, Robert Chote (5/12/12)
Autumn Statement: Headlines from George Osborne’s speech BBC News, Andrew Neil (5/12/12)
Autumn Statement: Flanders, Robinson and Peston reactio BBC News, Stephanie Flanders, Nick Robinson and Robert Peston (5/12/12)
Boosting the British Budget CNN, Jim Boulden (5/12/12)
Autumn statement 2012: key points – video analysis The Guardian, Larry Elliott, Jill Treanor, Patrick Collinson and Damian Carrington (5/12/12)

Autumn Statement 2012: the full speech The Telegraph (5/12/12)
Autumn Statement: Benefit squeeze as economy slows BBC News (5/12/12)
Autumn Statement: At-a-glance summary of key points BBC News (5/12/12/)
Austerity to last until 2018, admits George Osborne Independent, Oliver Wright
Autumn statement: George Osborne reveals benefits cut Channel 4 News (5/12/12/)
Autumn Statement 2012: Cut welfare, create jobs – a very Tory statement The Telegraph, Damian Reece (5/12/12)
Autumn statement 2012: economy weaker than expected, Osborne says The Guardian, Heather Stewart (5/12/12)
Analysis: Even the ‘autumn’ bit seemed optimistic BBC News, Chris Mason (5/12/12)
George Osborne’s autumn statement 2012: reaction The Guardian, Julia Kollewe (5/12/12)
Candid Osborne avoids political risk Financial Times, Janan Ganesh (5/12/12)
Autumn statement: Why George Osborne’s Budget won’t be a game changer The Telegraph, Allister Heath (4/12/12/)
Autumn statement 2012: expert verdict The Guardian, Richard Murphy, Dominic Raab, Ann Pettifor, Gavin Kelly, Prateek Buch and Mark Serwotka (5/12/12/)
The alternative autumn statement Channel 4 News (5/12/12)
Autumn Statement 2012: man cannot live by deficit reduction alone The Telegraph, Roger Bootle (5/12/12)
Autumn statement: cuts are just a sideshow The Guardian, John Redwood (5/12/12)
What does the Autumn Statement mean for business? Economia, David Mellor (5/12/12)
Autumn Statement Reaction: UK AAA ‘safe for today’ Investment Week (5/12/12)
Autumn Statement: A wintry statement of reality BBC News, Stephanie Flanders (4/12/12)
What has changed? BBC News, Stephanie Flanders (6/12/12)
UK warned on debt ‘credibility’ over AAA rating BBC News (5/12/12)

Autumn statement 2012 in charts The Guardian, Simon Rogers (5/12/12/)
Who suffers most from Britain’s austerity? How the figures stack up The Guardian, Tom Clark (5/12/12)
Economic and fiscal outlook charts and tables – December 2012 OBR (5/12/12)
Economic and fiscal outlook supplementary economy tables – December 2012 OBR (5/12/12)
Forecasts for the UK economy HM-Treasury

OBR, Treasury and IFS links
Economic and fiscal outlook – December 2012 OBR (5/12/12)
Autumn Statement 2012 HM Treasury (5/12/12)
Autumn Statement 2012 IFS


  1. Distinguish between ‘stocks’ and ‘flows’. Define (a) public-sector net borrowing (PSNB) and (b) the public-sector net debt (PSND) and explain whether each one is a stock or a flow.
  2. Summarise the measures announced by George Osborne in his Autumn Statement.
  3. What are his arguments for not adopting a more expansionary fiscal policy?
  4. Assess his arguments.
  5. What is meant by the ‘output gap’? What are the OBR’s forecasts about the output gap and what are the implications?
  6. How has quantitative easing affected PSNB and PSND?
  7. Distinguish between the cyclical and structural deficit. What implications does this distinction have for fiscal policy?

One of the key economic issues in 2010 has been the state of countries’ public finances. We take one final look this year at the latest state of the UK public finances in light of the latest release of Public Sector Finances from the Office for National Statistics. In doing so we will be updating our blog of 20th November – What’s £81.6 billion and still rising?.

Well, a good place to start is to up-date you on the amount of net borrowing. This is the amount by which public sector expenditure exceeds current receipts, almost entirely taxation revenues. After adjusting for the impact of temporary ‘financial interventions’ or policies to provide stability for the financial system, the amount of net borrowing in November was a record high £23.3 billion. Therefore, the amount of net borrowing since April and so the start of the financial year rose from over £81 billion in October – and the reason for the title of the earlier blog – to £104.4 billion in November. This is roughly the same as in the first eight months of financial year 2009/10 when we had amassed net borrowing of £105.1 billion.

In the first eight months of the last two financial years monthly net borrowing has averaged close on £13 billion. The government’s independent economic forecaster the Office for Budget Responsibility (OBR) released its Economic and Fiscal Outlook at the end of November. The OBR is forecasting that over the entire financial year the amount of net borrowing will be £148.5 billion or the equivalent of 10% of GDP.

The public-sector current budget balance measures whether the public sector is able to afford its current expenditures. This balance was an important indicator under the previous Labour government of whether it was meeting its Golden Rule whereby over the economic cycle it should be able to its afford current expenditures and any borrowing would be for net investment, i.e. capital expenditures giving rise to a stream of benefits over time. Therefore, the current budget balance compares revenues with current expenditures, including the wages of public sector staff, welfare payments and expenditures on inputs consumed in the current financial year. The public sector’s current budget (excluding financial interventions) was in deficit in November by £20.0 billion.

In the financial year to date, the current budget deficit has reached £83.2 billion almost identical to the total in the previous financial year. This means that the average monthly current budget deficit over the first eight months of the last two financial years has been £10.4 billion. The OBR is forecasting that there will be a deficit on the current budget in 2010-11 of £106.2 billion, the equivalent of 7.2% of GDP

Finally, we update the public-sector net debt total. The public sector’s net debt is its stock of debt less its liquid financial assets (largely foreign exchange reserves and bank deposits). As of the end of November, the stock of net debt (excluding the impact of the financial interventions) stood at £863 billion, equivalent to 58% of GDP. The stock of debt at the end of the last financial year stood at £772 billion, equivalent to 54% of GDP. The OBR expects it to increase to £922.9 or 60.8% by the end of this financial year.

The extent of the increase in the stock of public sector net debt is very clearly illustrated illustrated if we compare the latest numbers with those at the end of 2006/7 and so before the financial crisis really took hold. Back then, the stock of debt stood at £498 billion or 36% of GDP and so the last government was meeting it sustainable investment rule by keeping net debt below 40% of GDP. Both the sustainable investment rule and the golden rule were to be abandoned during 2008 as the financial crisis took grip.

If we add back the impact of the financial interventions, most notably the balance sheet effects of public sector banks, including Northern Rock, then the stock of public sector net debt at the end of November was £971 billion or 65.1% of GDP. This means that the actual stock has almost doubled since March 2007. It is perhaps little surprise that the government is introducing the Bank Levy in 2011 which, in large part, is being designed to acknowledge the external costs that the banking system can cause to the wider economy and, of course, to the public finances.


Public borrowing soars to £23.3bn record high Independent, Nick Clark (22/12/10)
UK borrowing hits new record high as government spending jumps Telegraph, Emma Rowley (21/12/10)
Government borrowing hits record high Herald, Douglas Hamilton (22/12/10) )
Public borrowing: What the economists are saying Guardian (22/12/10)
Shock as govt borrowing hits record high Sky News, James Sillars (21/11/10)
Record UK borrowing raises concerns Financial Times, Daniel Pimlott (21/12/10)
UK government borrowing hits record high BBC News (21/12/10)
City shocked as government borrowing hits record high Scotsman, Natalie Thomas (22/12/10)

Data on UK Public Finances
Latest on Public Sector Finances Office for National Statistics (21/12/10)
Public Sector Finances Statistical Bulletin, November 2010 Office for National Statistics (21/12/10)
Public Sector Finances (First Release) Time Series Data Office for National Statistics
Statistics on Public Finance and Spending HM Treasury


  1. Give examples of variables which are stock concepts and those which are flow concepts. Is public sector net borrowing a stock or flow concept? What about public sector net debt?
  2. Give examples of public expenditures which are examples of current expenditures and examples of those which are capital expenditures?
  3. What arguments could you put forward for and against the previous Labour government’s golden rule? What about its sustainable investment rule?
  4. Explain the difference between the current budget balance and net borrowing. Why might governments want to measure both these budget balances?
  5. What arguments would you make for and against a rapid reduction of the level of net borrowing by the UK public sector?

In his Budget on the 24th March the Chancellor of the Exchequer forecast that the public sector’s net borrowing, i.e. its budget deficit, in financial year 2009-10 would be £166.5 billion. This figure excludes the on-going effects from those ‘temporary financial interventions’ designed to ensure the stability of the financial system following the financial crisis. These interventions include injections of capital into financial institutions and payments received from financial institutions entering the Asset Protection Scheme – essentially an insurance scheme whereby these institutions could insure themselves against losses on assets placed in the scheme. The Chancellor also forecasted that the public sector’s stock of debt would rise to £776.6 billion. Again, the debt figure excludes the impact of ‘financial interventions’ and, in particular, the ‘balance sheet effects’ of those financial institutions now incorporated within the public sector.

The burgeoning size of the deficit and debt numbers has been the subject of considerable debate amongst the public, politicians and, of course, economists. Here we don’t intend to revisit those debates; rather we just present the latest public finance numbers from the Office for National Statistics.

Firstly, consider the budget deficit. The budget deficit is a flow concept representing the extent to which expenditures have exceeded receipts. Over the last financial year (2009/10), public sector net borrowing, inclusive of ‘temporary financial interventions’, was measured at £152.8 billion. When these interventions are excluded the figure rises to £163.4 billion; this is £3.1 billion less than was forecast in the Budget. Numbers of this magnitude are very hard to get one’s head around. But, some context is offered by expressing the level of net borrowing relative to GDP over the 12 month-period. This shows net borrowing in 2009/10 to have been equivalent to 11.62% of GDP, up significantly from 6.73% of GDP in financial year 2008/9. Further, it is considerably above the 2.6% average since 1955.

Secondly, consider the level of debt. Public sector net debt (net of liquid financial assets) is a stock concept. The stock of debt builds up if expenditures exceed receipts. It’s rather like the level of water in a bath tub; if the flow of water in through the taps is greater than the flow out through the plug hole, then the water level rises. At the end of the last financial year (2009/10) the public sector’s net debt, excluding ‘temporary financial interventions’, stood at £760 billion (£890b when including financial interventions). Again, putting this in context, this is equivalent to 53.8% of GDP (62% when including financial interventions), up from 44% in 2008/9 and 36.5% in 2007/08. Further, the level of public sector net debt relative to GDP was as low as 29.7% in 2001/2.

So what of future projections for deficits and debt? Well, part of the answer might lie in who forms the next government. But, as of February 2010 a Fiscal Responsibility Bill was enshrined in law. The Financial Responsibility Act, as it is now known, requires governments to set out legislative fiscal plans for delivering sound public finances and places a duty on Government to meet their plan. The Act also laid out the Government’s first Financial Consolidation Plan which includes reducing, year-on-year, net borrowing as a share of GDP up to 2015-16 and public sector net debt falling as a share of GDP in 2015-16.


UK budget deficit at record levels Associated Press, Jane Wardell (22/4/10)
Budget deficit at record £163 billion The Herald, Douglas Hamilton (23/4/10)
UK borrowing hits record £163.4 billion BBC News (22/4/10) )
Darling deficit highest in peacetime Financial Times, Chris Giles (22/4/10)
Gordon Brown wins boost as budget deficit proves £3billion lower than forecast The Guardian, Larry Elliott (22/4/10)


Latest on Public Sector Finances Office for National Statistics (22/4/10)
Public Sector Finances Statistical Bulletin, March 2010 Office for National Statistics (22/4/10)
Public Sector Finances (First Release) Time Series Data Office for National Statistics
For the Budget forecasts for the UK’s public finances see:
Annex C of the Financial Statement and Budget Report Budget 2010, HM Treasury


  1. What do you understand to be the difference between the concepts of ‘deficits’ and ‘debt’? Illustrate with reference to both your own financial situation and that of the public sector.
  2. In what ways will the Government’s interventions to ensure the stability of the financial system have affected the size of the budget deficit and the stock of public sector debt?
  3. If the government is to continue running deficits for the foreseeable future, how can public sector debt as a share of GDP begin to fall from 2015/16 as is set out in the Fiscal Consolidation Plan?
  4. What arguments can you make for government’s adhering to fiscal plans such as those now required by the Fiscal Responsibility Act?