Debts and Deficits. Do politicians know the difference?

On a recent trip to England, I caught a bit of a documentary that was talking about the national debt in the UK. The journalist chose 7 MPs at random and asked them how big the national debt was. Five of the 7 indicated that it was between 150 and 160 billion pounds, one said he left that stuff to the economists and one said that, while she listened to all the debates surrounding the nation’s finances, she couldn’t really understand it. The current debt is about 1.6 trillion pounds and if you include the unfunded pension liabilities of the civil service, the debt is estimated at 4.2 trillion pounds. This year’s deficit is 155 billion pounds. At least that is according to the journalist.

Why is it that we trust our nation’s finances to politicians that seem to have absolutely no idea what they are doing? This problem is not unique to the UK, but is prevalent in the US and Canada as well.

Ladies and gentlemen of the governing class, today’s lesson is the difference between the debt and the deficit. The deficit is the difference between this year’s tax revenue and this year’s government expenditures, when expenditures exceed revenues. The debt is the sum of all previous deficits, minus any surpluses.

Too complicated? The deficit is how much you charged on your Visa this month. The debt is this month’s balance. Clear? For those politician’s in the UK, you just charged 155 billion pounds, and this year’s balance is 1.6 trillion pounds. Interest charges amount to 42 billion pounds. The good news is, if you stop using your Visa today, and start paying 64 billion pounds per year, you will have the Visa bill paid off in just over 200 years. Of course that assumes that interest rates remain at 4% for the next 200 years and that none of the civil servants collect their pensions.

For UK voters, this formula requires a combination of tax increases and government spending cuts of 219 billion pounds per year. For US voters, better hope that the Republicans cut out more than just earmarks. No worries for Canada, we’ll just sell Vancouver Island to the highest bidder.