False Economy ran from 2010-2015. This site is no longer being updated, but the False Economy research team continue to report at Sentinel News.
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The wrong cure

What is the deficit?

The deficit is the gap between what the government spends and what it gets in income, mainly from taxes.

Big deficits are inevitable in a recession. Spending goes up to pay extra unemployment benefits. Tax income falls. Companies make smaller profits or even fail. Consumers cut back and pay less VAT. People who lose their jobs pay less income tax.

This has happened in almost every country in the world – not just the UK. You can't single out the last government for causing the deficit – even if they failed, like so many others, to see what was wrong with the world's financial system.

Graphs are often the best way to explain what's going on. This one shows just how steeply tax fell as the recession started.

UK government income and spending, 2002-2010

But what do we do about a bigger deficit?

If countries spend more than they get back from tax they normally have to borrow money to make up the difference.

Governments borrow all the time, and almost all have a national debt. It makes sense to borrow money not just to fill emergency deficits, but to pay for investment that will help make a country more productive. Many people want to lend money to governments because they are safe and secure. If you have a pension, it's a sure bet that some of your savings will have been lent to governments.

This is where the national debt comes in. This is everything the government has borrowed, not just this year, but in previous years.

If the government covers a deficit by borrowing money, then that will increase the national debt. When times are good and tax income is higher than spending, governments can pay back part of the debt and it will come down.

The difference between the deficit and the national debt is crucial. The deficit is a snapshot of how the country's finances are doing in any one year. The national debt takes into account what has happened in the past too.

A country with a smaller national debt can easily run a big deficit for a few years. A country with a big debt will find it harder to run a deficit as it will finds it harder and more expensive to borrow money.

Next: How big is the problem? »


Quick fact

6p in every pound went on paying off debt last year. In 1996 the figure was 8p.

Cuts are not the cure
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