Economy introductions: the size of the government deficit

Published: 29th May 2017

The deficit measures how much the government is borrowing in net terms—its income compared to its spending. This is not the same as the debt, which deals with how much the government owes. Reducing the deficit is not paying down the debt.

If the government spends more money than it receives, it runs a deficit. Since 1946/47, this has happened in all but 13 years.

Public Sector Net Borrowing, the widest measure of the deficit, was £48.7 billion last year (2016/17). That’s equivalent to 2.5% of the UK’s Gross Domestic Product (GDP).

As a percentage of GDP it’s fallen by almost three quarters since 2009/10 (9.9% to 2.5%). It’s down by about two thirds in cash terms (£152bn to £49bn).

There are several ways of looking at the deficit. The two most common are the current budget deficit and public sector net borrowing.

The current budget deficit is the difference between what the government spends on things like wages and welfare payments, and what it gets in current income (mostly tax revenue).

Public sector net borrowing is the current budget deficit, plus net investment: the difference between what government spends on assets like roads and buildings, and what it gets from selling these assets.

Both of these are usually measured without including public sector banks.

Deficit figures are often ‘cyclically-adjusted’ because the deficit changes with the business cycle.

In a recession, unemployment tends to increase, tax revenues fall, and spending on unemployment benefits rises. And in an upturn, employment rises, reversing this effect.

Cyclical adjustment means that we take out these effects, and estimate how large the deficit would be if the economy was 'in the middle' of the business cycle—so in neither a boom nor a bust.

Estimating the size of the cyclical deficit is difficult, and there's often disagreement over the exact figure used. Even once a number has been settled on, it can be revised in the future when more information is available.

In 2008 the Treasury thought that the cyclically-adjusted deficit for 2007/08 was about 2.7% of national income. The most recent figures from the Office for Budget Responsibility show that it was closer to 4%.

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