• Michael Roberts FPFS

Explainer: Difference between Debt, Deficit and GDP


Often, the words "debt", "Deficit" and "GDP" are mentioned in the media; but what do they actually mean, what's the difference, and how are the figures looking right now? Here's a brief rundown.


Deficit

The deficit is used to describe the difference between total spending of the government and what it receives in total income through taxation. It is sometimes referred to as public sector net borrowing, but the two are essentially the same thing.


According to the Office of National Statistics, for the month of December 2020, the deficit was estimated at £34bn. The previous December it was just under £6bn, so you can clearly see the impact of current events. It looks like we're on course for something approaching £400bn for the year, which runs to 31st March. In 2019-20 it was £46bn. The opposite of a deficit is a surplus.


Clearly, the impact of Coronavirus in terms of reduced tax receipts, and increased spending on various support schemes has had quite an impact.


Debt

Government debt is essentially the cumulative figure of all previous deficits (or, if you can imagine it, surpluses; ha!).


The debt position as at March 2020 stood at £1.8 trillion (more like £2.1 trillion by now), or £1,876.8 billion to be slightly less American. That is an extraordinary figure. If you went back in time just 1 second for each of those 1.8 trillion pounds that we owe, you'd arrive in somewhere around 55,000 BC.


GDP (Gross Domestic Product)

This is the measure of the total value of all goods and services produced by the country in a financial year.


It is interesting to compare the Debt to GDP ratio; this is currently estimated around 85% but estimated to be closer to 100% by the end of the current year. This has been on a generally increasing trend since the financial crisis, although has reduced a little, more recently.


However, this is certainly not unusual and many other countries are in a similar position. It has also been significantly worse, if we look back to World War 2 for example.


So, there you have it, a brief run down of these three key measures. It will be interesting to see what plans the Chancellor of the Exchequer has to address the current situation in his Budget on March 3rd. Naturally, we'll be keeping a close eye on the detail.


The data from this article has been compiled from the ONS website.


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