I spoke to a boy today who told me that the £50,000 he has on his credit cards should not be considered real debt. Why? Because he moves it from credit card to credit card. He never pays down the balance. And he doesn't intend to. For him, the minimum payment is the only compulsory payment, and therefore the only one that matters.
Worse, he is still spending his total expenditure every month comes in at around double his income. I asked him about what would happen if the credit card companies pulled in the loans. Or if interest rates rose. Or his income fell. They won't and it won't, he said.
Guardian writer Polly Toynbee seems to have a similar view on the national debt. There is no need, she says in a comment below her column, "to cut the deficit at once: Osborne describes the economy as if it were a household budget in which case what would happen to every household if they were forced to pay their mortgage back in four years not 25? These cuts are small-state ideological and risk being an economic disaster."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
It is a very telling quote indeed. Seems she thinks the deficit is just like a 25-year mortgage. But it isn't.
You could perhaps just about make a case that the national debt is a bit like a mortgage. It doesn't quite work in that a mortgage eventually buys you a valuable fixed asset whereas the national debt mainly represents previous consumption. But still, it is true that you don't have it pay it down all at once. Chucking in monthly instalments for a couple of decades until it was gone would be fine.
But the deficit isn't the national debt. The deficit is the amount by which the national debt is rising every year. If we cut the deficit we aren't actually paying anything back. We are just reducing the amount by which we are increasing our debt.
So having a deficit at all is not like having a mortgage. It is like having the finances of the fool boy mentioned above. Like having splurged on a credit card to the tune of a trillion odd and then splurging some more. And then some more. Making the minimum payments and ignoring the rising absolute level of debt.
If the boy is lucky his parents might eventually step into the breach and pay down his debt before the credit card companies bankrupt him. I wonder who Toynbee and the other deficit deniers think is going to step into the breach for the rest of the UK?
My friend Nick Reid, who pointed this article out to me, notes that economics can be very complicated for people who have never worked in finance. He's right. But this bit the vitally important distinction between a debt and a deficit, a mortgage and a credit card really isn't very complicated at all.
-
Bitcoin price one of the most-asked questions on Alexa - here's how to buy the cryptocurrencyAccording to figures from Amazon, which cover September 2023 to November 2024, pop star Taylor Swift and Bitcoin were named among the most popular Alexa queries of 2024
-
Investing for children this Christmas – five ideasIt might not come with a shiny ribbon, but an investment fund could be the gift that keeps on giving. We share five ideas if you are investing for children this Christmas.
-
Beating inflation takes more luck than skill – but are we about to get lucky?Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
-
Rishi Sunak can’t fix all our problems – so why try?Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
-
Young people are becoming a scarce resource – we should value them more highlyOpinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
-
Ask for a pay rise – everyone else isOpinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
-
Why central banks should stick to controlling inflationOpinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
-
How St Ives became St Tropez as the recovery drives prices sky highOpinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
-
The real problem of Universal Basic Income (UBI)Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
-
Why an ageing population is not necessarily the disaster many people think it isOpinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
