Is the deficit that important?

I often hear on the radio or read in the newspaper that the government is aiming to reduce the national debt and this is the reason for the strict fiscal policies they are implementing. That is an incorrect statement. The government cannot be looking at reducing the national debt, since the UK has such a high deficit at the moment.

The deficit is the difference between how much the government spends and how much it collects on a yearly basis. Our national debt however, is the total amount we owe. So the deficit in fact adds to the amount of debt, we as a nation owe. The difference between the deficit and the debt is especially important because when politicians talk about reducing the deficit, all that really means is that our debt isn’t growing as fast. It does not mean we’re actually getting out of debt.

Reducing the deficit is such a major objective as it is growing at a faster rate than the economy. This means a rising debt to GDP ratio, which in the future could provide the country with a debt that is out of control. Obviously this presents a problem, as shown by the way Greece has been affected by its huge debt, which is resulting in an economic collapse.

The deficit has already been greatly reduced by this government, as it has fallen to 8.3% of GDP, but more needs to be done to reach the 3% figure. Reducing the deficit flags up a certain policy conflict, as the reduction in government spending also makes it much harder for the economy to recover and overcome this period of stagnation. I personally feel that the deficit is a slightly more important focus, because if it continued to stay at such high levels, the effects on the economy would be much more dramatic and damaging than if we stay in a recession for longer.