Wednesday, January 5, 2011

Forecast for Government Debt


Looking through the HM Treasury website, I found these forecasts for UK public sector debt. [HM Treasury]
  • Gross government debt includes the current financial sector intervention (bank bailout)
  • Public sector debt excludes the financial sector intervention.
  • The good news is that with the improvement in the banking sector, the governments financial intervention looks reasonable secure and there is a good chance of regaining this bailout.
This graph shows debt to GDP ratio, and therefore depends heavily on the forecast for economic growth over the next few years. If growth forecasts (around 2% a year) are maintained it shows that the UK's debt to GDP ratio will be stabilised fairly soon. 70% is hardly critical given the amount of long dated securities and prospects for growth. It is also quite a contrast to countries like Greece and Ireland who have been unable to contain debt, despite austerity measures.

This shows that the current government have placed a high priority on controlling public finances. The paradox could be that austerity measures harm growth prospects and damage the debt to GDP ratio.

This is not all a success story. Targeting government debt is only one aspect of the economy. As an economist, I would have preferred the government to show as much enthusiasm for reducing unemployment. We still have a marked rise in unemployment rates causing higher welfare payments. Reducing unemployment and boosting long term growth prospects is still the best way to improve long term public finances without the pain inflicted by the current round of spending cuts and tax rises.


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