Wednesday, January 13, 2010

The deficit and debt in pictures

I’ve blogged before about the national debt and the deficit (here and here) and mainly this has involved throwing around a lot of numbers and percentages. For those readers who are less number inclined, the Adam Smith Institute has produced a fantastic graph which covers from 2000 to the present and I’ve reproduced it  below.

- Tax revenues as percentage of GDP are blue
- Public spending as percentage of GDP is red
- Public sector debt as percentage of GDP is purple
- The deficit as a percentage of GDP is green.

It shows two important points, the first is in 2001, when just after their second election victory it seems that the Labour party felt they had a mandate to apply their spend spend spend ideology and spending started to outstrip tax revenues (where the red and blue lines diverge). At this point the deficit sat around 4%. Don’t forget back then, the word recession was something from the past and no one had ever heard of a sub-prime loan or expected to have to bail out banks.

The second point is when the credit crunch and banking crisis hit properly and you see everything sky rocket, well except tax revenues which dipped, but don’t forget all of this is as a percentage of GDp so as that dipped too the actual tax receipts fell faster than the slope of the  line suggests whilst spending and  debt increased faster.

One interesting point that the Adam Smith Institute points out is that tax receipts have remained pretty steady at around 34% of GDP regardless of the situation (and interestingly despite increasing tax takes, changes in NI, the 10p tax band abolition etc) so that’s what a new incoming government should be aiming at. It won’t be easy though as at the moment public spending sits at around 48% of GDP, so we need a change of 14 percentage points.

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