The impact of the coalition’s plans on Britain’s debt

When considering the impact of the coalition’s spending plans it’s worth noting the impact they claim it will have on the Britain’s debt. There are 3 key figures to consider:

  • The total public debt. I.e. the total amount the government owes. According to the June budget, the official public sector net debt stood at 53.5% of GDP in 2009/2010 and was projected to rise to 74.4% of GDP by 2014/2015, had we stuck to the previous government’s plans. Under the coalition’s plans, the figure for 2014/2015 is just under 70% of GDP by 2014/2015, peaking at just 70.3% the previous year and falling to 67.4% by 2015/2016. In other words, even with the additional reductions in planned spending and increases in tax, the UK’s debt as a proportion of GDP will still grow for the next 4 years.
  • The budget deficit. This is the shortfall between total public spending and tax revenues for any given year. Again according to the June budget, the public sector net borrowing stood at 11% of GDP in 2009/2010, and was projected to fall to 4% of GDP in 5 years time under the previous government’s plans. Under the coalition’s plans, the deficit is projected fall to 1.1% of GDP by 2014/2015, and the “cyclically adjusted” deficit is project to be eliminated that year and go into surplus in 2015/2016.
  • The interest paid. This the minimum amount the government has to spend to service the debt (more needs to be spent to reduce it). This figure was projected to rise from £30.3 billion in 2009/2010 to £67 billion by 2014/2015 under the previous government’s plans. It is now project to rise to £63 billion in 2014/2015 and £66.5 billion in 2015/2016.

Thus the difference between the coalition’s plans and the previous government’s plans is that the former would see the deficit eliminated and the debt as a percentage of GDP starting to fall by 2015/2016, where both would still be increasing under the latter. And these figures are all dependent on economic growth projections being realistic. If growth is slower than expected, then eliminating the deficit within the current timescales will require even larger reductions in planned spending or bigger increases in taxation than we’ve seen thus far.

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