How big is the budget deficit?

David Cameron: "It is this Government who have cut the deficit we inherited by a quarter"

Claire Perry MP: "The deficit down by 25% since the election" (BBC Question Time, 25 October 2012)

Audience Member: "Isn't that a complete fallacy? I remember [a suggestion] that actually the data point that George Osborne collected the data from gave this impression that the decifict was down by 25% and actually if we wait until the end of the year the deficit is only down by two and-a-half percent." (BBC Question Time, 25 October 2012)

"We recognise that deficit reduction, and continuing to ensure economic recovery, is the most urgent issue facing Britain." Those were the words of the two Coalition partners back in 2010. The Spending Review later that year primarily set out how the Government would achieve this. The deficit was and remains the biggest economic issue facing the UK in the Government's eyes.

Viewers may have been puzzled, then, that such a central issue was shrouded in ambiguity on last week's Question Time after Claire Perry MP was challenged for repeating a much-used claim that the Government has cut the budget deficit by 25% since they came to office. The same claim has been made by the Prime Minister and his party numerous times.

However one audience member during last Thursday's show suggested that this could be a "complete fallacy" and that the total deficit reduction achieved by the Coalition so far might look much smaller if different measures are used. So what are the facts?

Analysis 

Anyone who wants to get the key headline figures on the state of the UK's public finances can do so via the Office for National Statistics' (ONS) monthly release of Public Sector Finances. The latest available data provides the numbers up to September 2012.

But that's where the simplicity ends.

The TUC's Nicola Smith explained earlier this month that the reality is complicated by the fact that there are two distinct ways of measuring the budget deficit; Public Sector Net Borrowing and the Current Budget.

Method #1 - Public Sector Net Borrowing

Public Sector Net Borrowing (PSNB), is what the Conservatives use to derive their claim. PSNB measures the gap between public expenditure and revenue that the government needs to plug through borrowing. PSNB for the latest 12-month period (October 2011 to September 2012) stands at £122 billion.

But crucially this figure includes public investment which has and is set to see significant cuts, according to the Office for Budget Rsponsibility (OBR).

It's similarly affected by occasional one-off transactions made by the Government, the most significant being the transfer of assets to the government from the Royal Mail Pension Plan which reduced the PSNB by £28 billion, as well as the end of the Bank of England's Special Liquidity Scheme in the same month, saving £2.3 billion. 

The Conservatives' 25% figure is now dated (it was made using estimates in August 2012, which have now been revised) but those for September are similar. It is calculated by comparing the PSNB as it stood in the 2009/10 financial year and comparing it to the latest full financial year - 2011/12.

Sure enough, this shows that PSNB stood at £159 billion in 2009/10 and fell to £121.5 billion by 2011/12 - a fall of 24 per cent (revised down from 25% as the figures stood a month ago). It's important to remember these figures don't include large financial interventions such as the public ownership of some of the banks - which are considered temporary effects on the data.

This is a perfectly valid way to calculate the reduction in the deficit but, as the TUC's Nicola Smith points out, this doesn't use the latest data. The ONS now provides figures up to September 2012 - some way beyond the March 2012 end point of the Conservatives' measure graphed above.

By using a rolling 12-month measure (we can't take a single month due to seasonality in the data), we can calculate a more up-to-date version of this measure:

Using the most up-to-date figures on the Conservatives' measure actually reduces the scale of the cut achieved during the Coalition's tenure to 20% thanks to a steady increase in the deficit in the second quarter of 2012.

This might be excused given that we're using revised figures now compared to when the 25% claim was being made, but using the old figures the party would have had access to at the time, the reduction on this measure is less still at just 17%.

So we can say that the most up-to-date estimate for the deficit reduction under PSNB is 20% if rolling 12-month data is employed - and was 17% at the time the 25% was being claimed by the Conservatives using financial years.

Method #2 - Current Budget

An alternative to using PSNB is examining the current budget - a method favoured by Nicola Smith and others as it excludes changes to investment spending and isn't affected by anomalous events such as the Royal Mail pension scheme transfer. In effect, it's simply a measure of current income less current expenditure.

As we might expect, excluding the cuts to public investment makes the deficit reductions achieved during the Government's tenure so far seem much smaller than when using PSNB.

This is where the Question Time audience member's figure of 2% comes from, although like the Conservatives' estimate this is now dated and newer figures are available up to September 2012.

Let's first see how using this measure affects the deficit in financial years, as the Conservatives use:

And finally, using a rolling 12-month measure to capture the latest data:

Back in August, the now out-of-date figures showed this 9% reduction as even less at just 2.6% - the source of the Audience member's figure. All these figures have since been revised by the ONS and so the 2.6% is no longer the case even comparing to August rather than September this year.

Conclusion

Gauging the size of the budget deficit, and perhaps more importantly the size of its reduction since the Coalition came to power, is a surprisingly difficult task.

Depending on whether you use Public Sector Net Borrowing, which includes investment cuts, or the Current Budget figures, you can get answers from a reduction of 24% to a reduction of 9%.

Since it's perfectly fine to use a rolling 12-month figure so the latest data is included, the stats say that the deficit has been reduced by 20% under PSNB or 9% under the Current Budget. Claims of this nature need to be handled with care.