Public sector vs consumer debt

There’s an interesting thing about the way public sector debt is reported which  means that the general public can’t understand it.

Generally as well as the headline figure (currently £848.5 billion) it is also reported as a percentage of GDP (currently 59.9%). So it’s reported as a percentage of the entire wealth created by the UK economy. The problem is that people look at that figure and compare it to themselves. They think well I earn X and I owe Y and that’s about 60% of my annual salary so what’s the problem.

The problem is that the annual salary of the government is not GDP, the annual salary of the government is tax revenues, which in the past 12 months have been £463.27 billion (about 32% of GDP). As a percentage of the public sector “salary” borrowing is actually 183% or 1.8 times income.

No problem says the man on the street, when I got a mortgage for my house the bank was willing to lend me three times my salary so the government could borrow 1.3 trillion and there will be no issues. Except that public sector borrowing isn’t the same as a mortgage. It’s unsecured, if you default on your mortgage the bank can swoop in and reposes your house if we default on our debt China can’t swoop in and repossess the Houses of Parliament and government estates.

Public sector debt is like an unsecured loan, or a credit card. If you take an average private sector worker earning £22,152 a year then to be the equivalent of the government they would owe £39,873 in unsecured loans and would be paying in interest alone £157 a month on their debt (the government is currently paying £4.3 billion) and continually putting off repaying the capital.

If it were credit card debt then using standard credit card minimum payments (3%) it would take that member of the public 27 years to pay that off at an interest rate of 12.9%, even at the public debt interest rate of just 5% it would still take them 20 years. If the the government was making the equivalent of a credit card minimum payment of 3% a month (which it isn’t) then it would take 21 years for the debt to drop below a billion pounds and 43 years to drop below a million in total it would take over 50 years to pay it off.

In reality it will take even longer than that. The government has said that it will halve the deficit (the amount of money they are spending above their income every year, not the debt) by 2013 so that’s another 3 years of borrowing at our current levels of £151.27 billion a year followed by who knows how long of adding at least £75.6 billion a year. It will mean that by 2013 the public sector net debt would be £1.3 trillion.

Under Labour plans to halve the deficit, if the government was an average private sector employee it would owe £62,272 in credit card debt (2.8 times their annual income) and under standard credit card interest rates would be paying interest of £669 a month and a minimum payment of £1,868, pretty difficult when before tax their monthly salary is only £1,846.

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