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How worried should we be about the Government’s finances and what does it mean for you?

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Gavin Simpson, who was born and brought up in Bishop's Stortford, and Pete Clift host award-winning podcast Economics in Ten. Here they delve a little deeper into the economic situation that is impacting us all...

Ever since the financial crisis of 2008, there has been a huge focus in economics on the public debt of this country. This has been compounded by the coronavirus outbreak and the huge amount of spending needed to support the economy through these unprecedented times.

We have therefore reached a point where, by the end of 2021, the public sector net debt was £2.1 trillion (the equivalent of around £32,000 per person in the UK) and the budget deficit was £323 million.

Gavin Simpson, left, and Pete Clift (55501918)
Gavin Simpson, left, and Pete Clift (55501918)

It’s important to be aware of the difference between the two, as they often get confused. The budget deficit is the difference between how much the Government spends in a year and how much it receives through tax revenue. The national debt is the total amount of debt the Government has accumulated over the years.

Normally, when the Government is discussing these issues it's talking about the budget deficit rather than the national debt. They are related though because, like any borrowing, the Government has to pay interest on it and therefore the higher the national debt, the higher the annual repayment, and this can make a deficit much harder to reduce for the Government. For example, during 2019-20, the debt interest was £41.6 billion.

So how worried should we be about a budget deficit? Since 1970-71 there have been only six years when the Government has had a budget surplus (when tax revenue is more than Government spending) and therefore a deficit is quite normal in the whole scheme of things.

One reason for this, put forward by the economist James M Buchanan, is that politicians want to win elections and it’s very difficult to do this without promising lots of Government spending and lots of tax cuts, which means politics comes before economics.

His views might also explain why the children of Bishop’s Stortford haven’t seen their skate park yet. If you're going to stop spending, you're more likely to do it in areas where the people who benefit are those who don’t vote!

There is a new strand of economists that believe deficits are not really an issue at all if the government is in control of its own currency, which the UK is. To find out more about Modern Monetary Theory, which this relates to, you should read Stephanie Kelton’s very readable book The Deficit Myth. It’s hugely controversial but fascinating nonetheless.

However, it’s obvious to see that right now the Government is concerned about the deficit, as shown by recent policies introduced by the Conservatives, who are known for ‘rolling back the state’ and favour tax cuts to tax rises. Much of this is not only to do with the recent past but also the problems that lie ahead for this country, as the 2020s will see the fastest decade for ageing, that will add an extra £76 billion on health and pension spending.

The skate park in Sworder's Field in Bishop's Stortford (55504266)
The skate park in Sworder's Field in Bishop's Stortford (55504266)

So what are these policies? The most obvious one is the rise in National Insurance contributions (NICs) that impacts employers, employees and the self-employed. From April, we will all pay an additional 1.25p in the pound to help fund social care in England. This additional payment in NICs will last only a year before we see introduction of the Health and Social Care levy from 2023, which will also be applied to state pensioners who are still working.

Also, the Government has frozen income tax thresholds, which means more people will move into higher income tax thresholds through pay rises (it’s known as ‘fiscal drag’ in economics) and therefore pay more tax than they otherwise would have in normal years when the threshold rises.

Finally, if you're a student going off to university or have recently finished your studies, then you'll find yourself paying back your loans relatively earlier as they have also frozen the income threshold on these.

Rishi Sunak (55501921)
Rishi Sunak (55501921)

In the middle of a ‘cost of living’ crisis, these changes will have a big impact on some people, but the argument is that by doing this now, there will be better times ahead. As George Osborne used to say, you need to fix the roof when the sun shines. The only problem is, many will see that currently it’s still raining!

There have been a lot of calls for the Chancellor, Rishi Sunak, to reverse the National Insurance increase, so it will be interesting to see what he announces in his Spring Statement next Wednesday (March 23).

What’s your viewpoint on Government finances?

Are you concerned about the NICs increase or do you think it needs to be done? Do you mind that it broke a promise in the Conservative manifesto or do you understand why it had to happen?

Are you a student concerned about these changes or do you feel an increase on average of £150 a year is a price worth paying for your university degree? We’d love to hear from you.

* Gavin and Pete's podcast Economics in Ten recently came second in the Independent Podcast of the Year poll in the PodBible Awards for 2021and two years ago it won the award. It can be found on any podcasting website at https://podcasts.apple.com/gb/podcast/economics-in-ten/id1450116373.

Gavin, who lives in Knebworth, was born and bred in Bishop's Stortford, attended The Bishop's Stortford High School and his mother still lives in the town. Through their Economics Ten podcast, he and Pete, who lives in Stanstead Abbotts, sponsor a player at Bishop's Stortford FC.

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