11.1 The measurement of public decits and debt

government’s current attitude to public sector borrowing. It then considers the

question of the nancing of public sector decits and the relationship between these

decits and interest rates in the economy. There follows a section on the Stability

and Growth Pact of the EU and the current debt position of EU members. The last

section of the chapter deals with the debate over the impact of large government

decits and high government debt on economic management more generally.

11.1The measurement of public decits and debt

Princes, monarchs and elected governments have always needed to spend more in

some years than they have received in taxation in those years. In earlier times, these

annual decits largely arose from the desire to ght wars. As we have seen recently,

this remains one reason for governments to wish to borrow.

These annual decits are nanced by borrowing from households, rms or banks

within the country or from abroad. The accumulation of these annual borrowing

requirements constitutes a country’s public debt. Before 1939, it was generally held

that governments should run annual decits only in times of national emergencies

such as wars. At other times, governments were expected to balance their budgets

and, thus, not need to borrow. After 1945, however, governments in many countries

took on new responsibilities, notably the achievement of high levels of employ-

ment and higher rates of economic growth and the development of a social policy

aimed at providing some protection for the poor, ill and old. This was probably the

major reason that annual government decits became a regular feature in developed

countries for the rest of the century. Public sector debt grew.

We can distinguish two types of annual decit – cyclical and structural. Cyclical

decits arise because countries experience fairly regular business or trade cycles –

periods of high unemployment and low income followed by periods of prosperity.

Naturally, in periods of low income the government’s taxation receipts fall and the

government’s social security expenditure rises, resulting in a budget decit. However,

the reverse should apply in periods of prosperity, producing a budget surplus. Con-

sequently, on this basis, we might expect budgets to balance, when considered over

a number of years. Government debt would, in the long run, remain unchanged.

Contrary to this expectation, many countries have run budget decits even in

periods of prosperity. Thus, they have, on average, run budget decits. This average

budget decit, which appears not to be directly related to a country’s position on

the business cycle, has been referred to as ‘structural’ – running a budget decit, it

was argued, had become the normal state of affairs. Attempts have been made to

estimate the size of structural decits by calculating what government debt would

have been in different years at some constant level of income or employment. Such

measures – the ‘cyclically adjusted budget decit’ or the ‘constant income budget

balance’ – make a number of assumptions and are, hence, subjective.

From the late 1970s in the UK, attitudes towards the public sector became more

hostile and, along with privatising the great majority of publicly owned corporations,

the government began to talk of the need to run balanced budgets. Budgets remained

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in decit most years, but the question of the size of these decits became a major

economic policy issue.

We have been talking here of balanced budgets and budget decits. In the UK,

the ‘budget’ refers to the statement of the planned receipts and expenditure for the

coming year of the central government. Financial markets are, however, interested

in the nances of the whole of the public sector and that includes any borrow-

ing carried out by public corporations or local authorities. Since the privatisation of

almost all the large public corporations, public corporation decits have ceased to be

an issue. Those businesses that remain in the public sector, such as the Royal Mail,

are these days required to run at a prot and so are net contributors to the public

nances. In addition, since the early 1980s, the ability of local governments to run

large decits has been heavily constrained. In the 1960s and 1970s, public corpora-

tion and local authority decits and debt were signicant contributors to the total

public sector gures. The changes that have occurred since the early 1980s, however,

have meant that central government activities have come again to dominate the

public nances.

The central measure of public sector borrowing is the public sector net cash

requirement (PSNCR). The PSNCR is a ow – an annual addition to the total stock

of public or national debt.

Public sector net cash requirement (PSNCR):The amount that must be borrowed by

government in those years in which total public sector receipts from all other sources

are less than total public expenditure. It was known until recently as the public sector

borrowing requirement (PSBR).

As we shall see in Box 11.1, a number of adjustments have to be made to bring

the PSNCR into line with annual changes in total public sector net debt (public debt,

for short). The public debt is a stock measured at the end of each nancial year.

Note that the term ‘national debt’ refers specically to the total liabilities of the

National Loans Fund. While the national debt is clearly related to the public sector

gross debt, it is not identical to it (see Box 11.1, which lists the various components of

the public debt). For example, at 31 March 2002, the national debt stood at £434.5bn

whereas public sector consolidated gross debt was £372.28bn.

Public sector net debt:The combined debt (gross debt – liquid assets) of the central

government, local authorities and public corporations on a given date.

The argument that governments should not run budget decits is sometimes

conducted at a simplistic level through a comparison of government accounts with

household budgets. In the 1980s, for example, the British prime minister, Margaret

Thatcher, claimed that it was ‘bad housekeeping’ if the government had to borrow.

In fact, the calculation of the PSNCR involves several questions of accounting

practice, and its interpretation requires the consideration of a number of important

economic issues.

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