You are probably feeling quite fed up with politics, politicians and all the talk of May 2015. If not, the chances are you may be one of those planning to run in the General Election.
Wherever you look, the Parties are sounding off in what they are calling the ‘long campaign’ which runs from now until April, and the Deficit is something we are already hearing a lot about.
But when a Westminster politician starts talking about Deficit reduction, or making statements that indicate they ‘plan’ to reduce the Deficit to zero by the year XYZ, you may be one of the many people left wondering what they are actually talking about and what it really means.
You might not be sure what the Deficit is. You may not understand the difference between the Deficit and the National Debt. But whatever question you may have, don’t worry. Even MP’s have struggled to explain the difference when they have been asked to do so.
Giving new names to existing products, services or methods of working isn’t a new idea. In fact, it’s not just Westminster politicians who use new names to sell their ideas and many of the new products you buy will just be a re-hash of an old idea using new words to describe something differently; just so it sounds like something better.
Selling is one thing. Misleading us another. The term Deficit is perhaps one of the biggest red herrings that Westminster has created, and especially so when they use it to draw attention away from the spiraling National Debt.
So what is the Deficit?
Perhaps the easiest way to picture the Deficit is to think about the Government as a person. A person who earns money and then spends that money on house-keeping and all the things that it might need.
Where we might run a home, the Government’s house is the whole of the UK.
Where we might spend our money on food, the mortgage or rent, clothes, transport, paying back loans and maybe going out, the Government’s housekeeping bill is public services such as the NHS, the Police, Armed Forces, Education, Transport and Local Government.
Whereas we would do a ‘job’ to earn a salary or perhaps an hourly rate of pay, the Government ‘earns’ its money through Income Tax (PAYE), National Insurance, VAT and all the other types of Taxation which we all pay.
Whilst most of us can only earn what our employer agrees to pay us, every year, the Government sets itself a Budget for all the money it will spend on public services. The Budget should ideally not be more that what the Government has ‘earned’ or will ‘earn’ from Taxes during the year that the money will be spent.
When a Government decides that it wants to spend more in a Budget for a year than it will ‘earn’, it has two choices. The Government can raise Taxes so that it has more income than it did before, or it can borrow on top of what it has earned and ‘overspend’ – even though we are normally told that they are spending within Budget.
The difference, value or balance between what the Government ‘earns’ and what it has planned or does actually spend in its Budget, is what Westminster politicians call the Deficit.
Each Budget Deficit – or the Deficit for that year, is what we would call a loan*.
The Government pays interest on that loan*, and this interest – and the money which has to be paid back each year is then added to the housekeeping bill for the term or lifetime of the loan.
When the outstanding balance of the loan* and interest for the year isn’t paid off, it becomes the National Debt and every unpaid Deficit or overspend for each year is added to this.
Another term you may hear used by Westminster politicians in the coming months as one of their ‘aims’ is ‘Budget surplus’ or just ‘surplus’.
A surplus in this sense would be the sum of money left over if the Government did not use all of the money it ‘earned’ from Taxes in a year and then had some left over.
Reaching a surplus would be the only point that the Government could then begin reducing the National Debt.
The Conservative Chancellor, George Osborne is suggesting that this will be achieved by 2020 if the Conservative Party are elected with the majority of seats in Parliament in May. Being in Government with a majority and not as part of a Coalition as they have been since 2010, will allow them to make even more cuts to public services than they have so far and this is how the Conservatives plan to reach a point where they have a surplus.
Whether you support the plans that any of the Political Parties have or not, the fact is that this Coalition Government and the Labour Government before it have both had an annual Deficit or have overspent each and every year for a long time.
We wouldn’t be able or allowed to spend money like this ourselves unless we had savings to fall back on, and neither would the Westminster politicians if they were dealing with their own finances.
* The way that the Government ‘borrows’ money is not normally the same as going to a bank and asking for a loan. To borrow money or ‘raise funds’, the Government usually sells bonds, which banks, other financial organizations and sometimes even other Countries buy on the basis that they will get the value of the bond returned to them at the end of the lifetime of the bond – probably 3 or 4 years, and that they will receive a fee or fixed amount of interest on top of that for the period too.
When a bond comes to the end of its lifetime and the Government is unable to pay off the balance or value of that bond and its interest because there is not a Budget surplus, the Government then sells more bonds to cover the cost of doing so.
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