Public Spending in the UK: Public Sector Debt

The debate on the future of the public finances and especially spending on public services has finally come to the fore after all the diversions of the past few months.

What are the crucial questions that we should demand of our politicians? Over the next couple of weeks I’m going to try to outline what are the crucial policy issues – starting with public sector debt.

How big a problem is it that we have such a huge public debt? Gordon Brown’s old rules were that net public debt should not exceed 40% of GDP and that ‘over the economic cycle’ money should only be borrowed for investment (i.e. building schools and hospitals) but not for current spending. Both of these rules have currently been smashed – many argue that the second was already true long before the current crisis and we had a ‘structural deficit’ in the public finances.

Most would agree that the projected levels of public debt are too high, and would need to be brought down to something like the old targets, but the questions are to what levels and how fast?

Labour: Total public debt was forecast in the Budget 09 to increase to 76% by the end of FY 2013-14 – i.e. towards the end of the next Parliament. That is of course based on Labour’s spending plans and their estimates of the state of the economy over the next 5 years. So Labour only plans to reduce public debt very slowly, probably over something like 2 parliaments or more (i.e. a decade).

Conservatives: seem to be saying they will reduce public sector debt to much lower levels much more quickly. They haven’t said how much – e.g. would 40% of GDP be acceptable? Nor have they said precisely how quickly. But if we assumed a 40% target and one parliament, this would be almost a 50% reduction (from 76% of GDP to 40%) or from £1,370bn to £719bn – a reduction of £650bn over 4-5 years.

In future posts I’ll examine how they say (or rather mostly don’t) how either of  the above alternatives could be achieved. What is clear is that they are alternatives, which is a big change from the stance of both parties over the past decade where they have more or less matched each others public debt policies.

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