The budget deficit - or surplus - is the difference between the government’s everyday expenses and its revenues: between what it spends and what it receives. In recent years, the UK government has spent a lot more than it receives, and the nation are almost too used to hearing about the budget deficit in the news - but what does it all really mean?
There is a direct link between the current budget and a country’s debts. If the government runs a deficit, it is effectively overspending and adding to the debt. If the government was running a surplus, however, they could establish a capital reserve and start working towards rebuilding the balance again.
If, by some miracle, the current government spent less than it received, then it could begin to pay off the deficit. This may seem a distant pipedream in today’s economic climate, but between 1998 and 2001 we had four straight years of expendable income. And from the years 1947 to 1974, the budget was again a continuous surplus.
To many a critic, a return to those golden days are far off, but both the government and opposition are pledging to return the current budget to surplus in the next Parliament. It seems fairly simple, but then there are different types of deficits, and politicians are throwing them around like the latest buzzwords.
One of these, a favourite of the Conservative party, is the structural deficit. This is the current budget deficit, adjusted to strip out the cyclical nature of the economy. You would expect, for example, the budget deficit to narrow when the economy grows after a sluggish period, as it has begun to. However, the structural deficit attempts to exclude the effect of this recovery in order to reveal the true cost of the deficit. In other words, the structural deficit is the part that remains, even when the economy is operating at full tilt. It’s the underlying deficit that is not directly affected by economic performance (see figs. 1, 2 and 3).
Providing the current growth continues for the next few years and tax receipts keep coming into the treasury, then our economy will return to a surplus. Many factors can affect the UK’s performance, such as the world’s economic health, our own productivity and how the spending departments are controlled within the government.
What this means is that the argument for which political party can run the economy better is not one the voter should be factoring in to their decision. There are many elements that fall outside their control, regardless of what they may promise, and in the past both Labour and the Conservatives have provided surpluses and good levels of growth to go with them. Your vote should come down to what you want the government to provide for the country, and not how good they are at managing the economy, as much as they would like to convince you otherwise.
Words: Martin Brown
Image Source: The Independent, UK