Merryn's Blog

Why Britain's deficit is nothing like a mortgage

There is a huge level of public ignorance about what the budget deficit actually is. It's nothing like a mortgage. It's more like a crippling credit card bill on which we're barely making the minimum payment, while the balance spirals out of control.

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.

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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."

It is a very telling quote indeed. Seems she thinks the deficit is just like a 25-year mortgage. But it isn't.

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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.

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