government borrowing

The Public Sector Net Cash Requirement (PSNCR) is the combined financial deficit of central government + local government + the public corporations. It measures the annual borrowing requirement of the government sector in the economy.

When the government is running a budget deficit it means that total public expenditure exceeds revenue. As a result, the government has to borrow through the issue of government debt.

If the government sector is taking in more revenue than it is spending, there is a budget surplus allowing the government to repay some of the accumulated debt, of perhaps cut the burden of tax or raise government expenditure. As the chart above shows - there has been a significant improvement in government finances in recent years. The government has run large budget surpluses in each of the last three financial years.

Measuring the PSNCR

The amount that the government has to borrow each financial year can be measured in a number of ways:

Nominal PSNCR - is the total borrowing requirement in money terms making no adjustment for the economic cycle
PSNCR as a % of GDP gives economists a good measure of the scale of the debt problem that may exist.
Cyclically adjusted PSNCR takes into account the effect the economic cycle can have on the PSNCR. For example, in a recession the PSNCR nearly always rises automatically because of higher benefit payments and reduced tax revenues.

Budget Deficit and the National Debt

The public-sector net cash requirement is how much the public sector needs to borrow to finance its expenditure plans each financial year. It is borrowing by central government, by local authorities and by public corporations.

The national debt is the total amount of borrowing undertaken by central government which has not yet been repaid. In other words, it is the sum of all outstanding central government debt. In recent years the total national debt has started to fall following the movement into surplus on the government's own financial accounts.

DOES A HIGH LEVEL OF GOVERNMENT BORROWING MATTER?

The important question is what central government does with the money it has borrowed. When funds are allocated to public sector capital investment in roads, schools, hospitals and other items of infrastructure this enables the nation to increase the output it can produce. This will make it easier to pay off previous debts or to pay the interest on them.

However, a budget deficit has to be financed - normally through the issue of new government debt to the capital markets. For a government with a good credit rating, the sale of new debt is rarely a problem. Most financial institutions are happy to purchase debt because they regard them as assets on their balance sheets.

Secondly if there is a large pool of savings in the economy, the issue of government debt (which soaks up some of these savings) will have little impact on the ability of private sector businesses to find sufficient funds to finance their investment.

There are some economic risks associated with a high level of government borrowing:

If the economy has only a small supply of savings, increased government borrowing may force up interest rates and crowd out private sector investment
Higher borrowing in the long-run requires an increase in the tax burden - this may dampen demand and economic growth
If the national debt increases, annual interest payments on the debt goes up - money that might have been spent in priority areas

Recent trends in UK Government Borrowing

The chart shows the fluctuations in government borrowing over the last thirty years. Small budget surpluses in the late 1980s were the result of very strong economic growth. But the recession in the early 1990s saw a return to historically large budget deficits.

The economy has experienced sustained economic growth and falling unemployment since 1993 and this, together with a range of tax increases and better control of government spending, has seen a sharp improvement in government finances. A budget surplus is forecast for 1999-2000 and in subsequent years.

Reasons for the budget surplus

Sustained economic growth - Record levels of employment / low unemployment Strong consumer spending - higher indirect revenues Increases in taxation Higher real excise duties (fuels, cigarettes)

New taxes - airport passenger duty Increase in national insurance contributions Taxation of pension funds Higher council tax bills

£22.5bn from the auction of third-generation mobile licences

Tax revenues have risen much more strongly that government spending during the first term of the Labour Government. This is shown in the diagram below,

Labour's "Golden Rule" on Borrowing

Gordon Brown introduced the Golden Rule in his first budget statement in July 199. When a government borrows only to finance investment and not to fund day to day spending, it is following the Golden Rule.

Government spending on current goods and services and social security benefits must be met by revenue from taxes, but investment for the future (asset accumulation) can be met by borrowing.

Structural and Fiscal Budget Balances

In the recession / slowdown phase of the economic cycle government finances worsen because tax revenues slow down and social security payments start to rise. The structural budget balance seeks to make an adjustment for the effects of the economic cycle.

The chart above shows the annual structural budget balance for the UK using OECD estimates. The UK has run a structural deficit in each year although the forecast for 1999 is the lowest yet. This suggests that steps to control government spending have been successful. Tax revenues have also grown considerably - in part because of the introduction of self-assessment a few years ago

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