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UK National Debt -Growing Forever?

Politicians of all parties in the UK refer constantly ( unless they forget when making speeches) to "reducing the budget deficit".

The budget deficit is the difference between the governments expenditure and revenue.

The UK government currently spend around £730 to £750 Billion each year. Meantime, it has revenue of around £610 to £630 Billion annually. So there is a budget deficit of in excess of £100 Billion per annum.

George Osborn has a stated objective of achieving a small budget surplus by 2020, 5 years from now. In the interim, the deficits will keep on adding to the UK National Debt at a rate of around £100 Billion each  year.

The UK National Debt is currently about £1.4 Trillion. So, with around £100 Billion being added each year, it will reach approximately £2 Trillion by the year 2020.

How much it costs for the UK to service the National Debt of course depends on the interest rate the governments pays to raise money. It is rather similar to having an interest-only mortgage: the debt is never paid off but creditors are happy getting the interest.

If the UK government has to pay 2% interest to borrow money, the cost of servicing the £2 Trillion National Debt outstanding by 2020 will be around £40 Billion each year, or, put another way, around 7% of the revenue the government enjoys.

No political party I know of has plans to substantially reduce the National Debt. Frankly, none of them knows how to do it.

Does reducing the annual deficit matter? Well, in the very long run ( when we are all dead anyway) perhaps. In the short term, however, it does not. Another £100 Billion of National Debt, incurring 2% interest,  "only" costs the UK government £2 Billion each year. Small potato's, in the great scheme of things.

The low cost of extra debt explains why opposition parties in the UK, along with external bodies such as the International Monetary Fund, often question the current austerity program of the UK government. 

Why is it necessary, for example, to reduce benefits to the low paid by £3 Billion, when it makes no real difference to either the National Debt or government interest payments?

Hopefully, it is debates on such issues that will get mileage in the run-up to the 2015 UK General Election.It would certainly be foolish to focus on reducing the National Debt, because no politician has any intention of doing so.

  

 

 

Friday, 3rd October 2014

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