Tuesday, 7 June 2011

My bit of public service for this morning

Oh My Word. I've just seen something about a survey that found only one in seven people (14%) knew the difference between 'debt' and 'deficit'. Here's the question:
The government says it wants to eliminate the budget DEFICIT in five years. From your understanding, if it succeeds, will total government DEBT in 5 years time be…
And here are the answers:
14% - Higher than it is now
23% - About the same as it is now
36% - Lower than it is now
10% - Fully paid off
18% - Not sure
No wonder Labour didn't get absolutely wiped out in the last election; it seems the vast majority of the country don't realise just what a mess they've made of the UK's finances!

So here goes with my attempt to explain what the difference is between those two words beginning with 'D'.

Debt – how much money you owe in total
Deficit – the difference between your costs and your income over a certain time period

That's it! Simple as that. So if you take out a £150,000 mortgage to buy a house, you are now £150,000 in debt. That's usually fine because as long as your income is higher than your costs then you'll gradually pay the mortgage off (unless you're on an interest-only mortgage but that's another story...). But if you're personal finances are in deficit, meaning that you're actually spending more than you earn, then your debt will increase; you'll owe more than what you initially borrowed to buy the house.

Here's the bit that people in the survey evidently didn't grasp. Reducing the deficit just means that your debt won't be increasing at such a fast pace. And if you manage to get your deficit down to zero (so your income and outgoings are the same), you'll still be in debt but your debt will stay the same. It won't go away though.

Returning to the UK's national finances just to finish, if we do indeed reduce the deficit to zero in five years' time that means our debt will still be increasing over the next five years. It just won't be increasing so rapidly. And in five years' time, if the deficit is then zero, our debt will stay steady (but we'll still be coughing up the interest payments on one and a half trillion pounds or so of debt). Simple as that, right?

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