Spending and Revenue – UK

Government debt and public borrowing

It really should be an easy thing to understand public debt and public borrowing, but I have to admit that I’ve never really got my head around the difference between a structural deficit, government debt, etc. etc.

For this article I’m going to dig deep into the UK public finances between 1960 and 2016 and try to examine the question of whether or not our public debt is anything out of the ordinary right now. I’m also going to take a look at the structural deficit, how unusual that is, and how we could get it under control.

GDP

Let’s start from the very basics. GDP stands for Gross Domestic Product, and it’s a measure of the size of the economy. GDP can be quoted in various currencies, and for comparison purposes is often quoted in Dollars. But for the purpose of this article I’ll show all monetary values in Great British Pounds (GBP). This factors out the currency markets as one of the underlying sources of noise.

First up let’s take a look at GDP in real values for the last 56 years.

gbppounds

This tells an interesting story. Basically our economy is bloody booming. Back in 1960 the entire economy generated £26.412B, in 2015 the economy generated £1871B. That’s 71 times bigger!

Well, hold on there. It’s not quite that simple. The other thing going on over this time is that the GBP has become worth less in terms of what it can buy due to something known as inflation. The rate of inflation is measured in various different ways, but for the purposes of this article I’m going to use the Consumer Price Index (CPI). This gives a percentage number per year, that the currency has gone up for buying the exact same thing. i.e. imagine this year a loaf of bread is £1. Next year it’ll be £1 multiplied by 1+CPI. For the last 56 years CPI has been anywhere from -0.5%, to 25% (!). In the case of hyperinflation, CPI can run at millions of a percent, and that is generally known as a bad thing(tm)

To make this a bit clearer, let’s imagine that I have an object that I could buy for exactly £1 in 1960. The following chart shows what that object would cost for each year up until 2016.

onepound

(Note that CPI is different to the interest rate which would measure how much my money appreciates over time, although often inflation and interest rates are correlated.)

Using this CPI number we can now modify the GDP numbers for each year going back to 1960. This is what our GDP chart now looks like.

gbpadjusted

This gives us a much more solid view of what’s happened to GDP over the past 56 years. Our economy has become larger, but only by a factor of 3.4. It also becomes obvious that our economy is producing less in 2015 than it was in 2008. This is the great recession as it’s called in the US, the financial crash if you want to use UK language.

There’s one other factor that needs to be taken into account and that’s the UK population. First up let’s take a look at what the UK population has done over the past 56 years…

ukpopulation

This isn’t the most dramatic chart, but you can see a general upward trend. Let’s factor that into the GDP chart so that we get to GDP per person, also known as GDP per capita.

gdppercapita

This time round things are even a little more depressing. The average GDP per person has gone up by a factor of 2.8 since 1960. Hardly explosive growth, but still a general trend of growth. 2008 looks a lot worse though with GDP per capita in 2015 only just hitting the level it was at in 2002. That probably helps to explain the general malaise of people feeling poorer. We are poorer.

Government Debt

Government debt is the next element of the economy I’ll introduce. Government debt is the amount of money that has been borrowed to pay for services, infrastructure, wars, etc. by the UK government. We’ve been running deficits since 1692 when William III first raised money in the City of London. Over that time debt has peaked on a few occasions such as 1815 at the end of the Napoleonic Wars, and 1945 at the end of World War II. Current government debt is well below either of those peaks, but let’s take a look at what government debt looks like in today’s money.

ukdebt

And all of a sudden the last few years look pretty horrific.

Since 2008 the government has taken on over a trillion pounds worth of debt. It’s a ridiculously huge spike. There is another way of looking at this data which is as a percentage of GDP. This graph doesn’t look quite so horrific…

ukdebtpercentgbp

In fact, this view of the data is significantly different. Back in 1960 we were running a government debt at 105% of the size of our economy. Last year we were only at 83%. Annoyingly we were at only 22% back in 1991, and this has clearly deteriorated rapidly since 2008.

How did we get into this position? Well basically, as anyone knows, if you spend more money than you’re getting in, you’ll end up in debt. For the UK economy we’ve clearly been spending more than we’ve been raising in revenue since 2008. But is this because spending has increased, or is it because revenue has decreased? Let’s take a look.

Spending and Revenue

The following chart shows UK government spending, and UK government revenue, CPI adjusted since 1960 in GBP.

revenueandspending

What you can see is that we took a double hit in 2008. Firstly our revenue declined following the crash in the economy. Secondly our spending has accelerated during the same time period. In fact it looks like they both moved by about the same amount in opposite directions.

How unprecedented is this though? Well lets start by looking at the data a little differently. This time spending and revenue are shown as a % of GDP.

spendingandrevenuegdp

This confirms the general trends we saw in CPI adjusted numbers, but this time round we can also see that there are significant bubbles in public spending in the mid-70s too. What’s interesting is that spending falls away quickly in the mid 70s, and also again from 82 to 88. During the current fiscal difficulties spending is dropping, but more slowly than during previous corrections and from a near record peak.

The other correction we’ve seen previously is a rapid increase in revenue from taxation, but again this time round we’re seeing a gradual rise in revenue rather than the required dramatic correction. In fact, for the 2010 year we see a dramatic drop in revenue as a % of GDP (note that this is not due to a drop in GDP, as GDP is factored out for this chart). What caused this?

I’ve actually spent quite a bit of time trying to work this out. It’s definitely undeniable that government revenue dropped during 2008 to 2010 (562.99, 552.76, 536.24), and then began to recover from 2011 (576.53). The only thing I can find for certain is that the higher rate of income tax jumped from £34.8K in 2008-2009 to £37.4K in 2009-2010. I’m unconvinced this is the whole reason for the drop, as it remained at that level for two years while income tax started to go back up. Any ideas anyone? Comments section below please. :)

In summary though, I remain uncomfortable with the levels of debt the UK is building up. Revenue remains historically low as a % of GDP, and spending remains historically high. I can’t see any signs of real austerity in government policy, although the stagnant GDP makes it harder to get aggressive on spending cuts. Overall though I wish someone had made quicker corrections in 2011 to prevent us getting into this crappy situation.

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