11.1 The measurement of public decits and debt

Table 11.1The PSNCR and the PSNB

General government* current receipts

General government current expenditure

Public sector current balance

General government capital receipts

General government capital expenditure

Public sector net borrowing (PSNB)

Net lending by general government to other sectors^†

Public sector net cash requirement (PSNCR)

* General government central government local government

^†Net lending to public corporations and the private sector less net receipts from the sale of public

corporations

An increase in income tax, for example, shows up in the accounts as an increase in

the current receipts of general government. The sale of government-owned buildings

such as a closed National Health Service (NHS) hospital or council houses appears as

a reduction in general government capital expenditure. The sale of a public corpora-

tion (such as British Telecom (BT) or British Gas) appears as a reduction in the net

lending to other sectors by general government (see Table 11.1). Nonetheless, both

increasing taxes and selling off public assets lead to a lower PSNCR.

However, the economic effects of these two ways of raising revenue may be quite

different. An increase in income tax rates reduces disposable income and people

respond by reducing their demand for current goods and services: or, at least, the

rate of increase in demand slows down. Consequently, the rate of increase of output

in the economy falls. The increase in tax rates acts to contract the economy, having

effects on unemployment levels and ination rates.

By contrast, consider what happened when BT was privatised. Shares in the company

were seen as a nancial asset by prospective buyers. The decision to buy depended

on how attractive the shares seemed as a nancial investment compared with other

nancial assets. Thus, people sold other nancial assets to enable them to buy BT

shares. In fact, most of the buyers of small packets of shares raised the funds for

the purchase by running down their building society balances. Disposable income

was not reduced and there was no direct effect on demand for goods and services

in the economy. Of course, the very large sales did affect nancial markets and may

have inuenced interest rates on other nancial assets. However, the impact, if any,

on the real economy was far from clear. The sale of public sector assets may not be

contractionary at all. This difference has led to emphasis in the public accounts also

being placed on public sector net borrowing (PSNB), formerly known as the public

sector nancial decit, and the presentation of statistics on the public nances by

the ONS has been changed to make this clear.

Public sector net borrowing (PSNB):Equals the PSNCR plus the net receipts from the

sale of public corporations and other nancial transactions.

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Chapter 11 • Government borrowing and nancial markets

The PSNB is, then, the difference between total general government receipts

and expenditure (both current and capital). As can be seen in Table 11.1, it excludes

net lending to other sectors and, since the sale of public corporations is treated as a

negative item under this heading, it excludes privatisation receipts. Thus, in any year

in which the government has signicant net privatisation receipts, the PSNB will be

greater than the PSNCR. We should note, however, that the PSNB still takes account

of revenue raised by the sale of general government assets (assets of the central

government or local authorities). For example, net receipts from council house sales

reduce both the PSNCR and the PSNB.

An alternative way of classifying the public nances of use in economic analysis

involves subtracting interest payments on the public debt from the PSNCR. This

gives us the primary balance. This, in turn, can be divided into the primary current

balance and the primary capital balance. The reason for doing this is to analyse the

causes of the growth of public debt. We have seen in Box 11.1 that the public debt

has as its principal counterpart market holdings of government securities. As long as

these securities continue to be willingly held, the public debt need never be repaid

and, indeed, can go on increasing. This is simply a restatement of the proposition

above that there is no necessary problem in having a PSNCR each year as long as

people are willing to continue purchasing sufcient additional government securities

each year.

Nonetheless, the public debt can be argued to constitute a burden on the economy

since interest must be paid on it. These interest payments must be met by increased

taxation revenue or they will add to the PSNCR and hence to the size of the public

debt. A higher public debt in turn increases interest payments on the debt, even if

higher government borrowing does not push up interest rates. The size of the problem

is, however, reduced to the extent to which an economy is growing. As an economy’s

real income increases, higher tax revenues are raised without increases in tax rates.

That is, the richer a country is, the more easily it can afford to pay the interest on its

debt. These points have led to the development of a rule relating to public debt growth

– that if public sector decits are met entirely by public borrowing (generating

a PSNCR equal to the decit), the public debt will continue to grow as long as the

real interest rate payable on the debt is greater than the rate of growth of GDP. This,

in turn, raised the prospect that the public debt of economies with a high public

debt/GDP ratio growing out of control would require them ultimately to renege on

their debt repayments. Therefore, the term ‘sustainable public debt’ came into the

vocabulary of economics.

Sustainable public debt:A public debt sufciently small that it can be nanced without

adding to ination and without pushing interest rates above the country’s rate of

economic growth, which would raise questions about the ability of the country to meet

its debt repayments.

Although it is rather odd to express a stock (the public debt) as a percentage of

an annual ow (GDP), this ratio has been widely used to provide an indication of

a country’s ability to afford its public debt. For example, it was used as one of the

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