The deficit - over 85% of it is the cost of the bank bailout!

[ColdComfortFarm]

Ok, I've been really shocked by the figures cited for the size of the deficit - over 927bn. And recently I've wondering what the point of cutting 1bn by axeing child benefit was in the face of such a huge debt. Now I have discovered that more than 85per cent of the deficit is not profligate Labour spending, but the cost of the bank bailout that saved the country from total financial collapse. The deficit in April EXCLUDING the bank bailout was 156bn (not pocket money but nowhere near 927bn). The cost of the bank bailout was £850bn source here: www.independent.co.uk/news/uk/politics/163850bn-official-cost-of-the-bank-bailout-1833830.html
Economists and people who seem to know about such things on Mumsnet keep saying that no real money has actually gone to the banks - that there are guarantees which have not been used, and which are being paid for very handsomely by the banks, and money spent on shares, which have risen in value....so are we being sold a totally artificial panic? It seems so.

If this is correct - and it looks as if it is - why is the Labour party not talking about it? I don't understand.

Oi, I wanna discuss this! It's important

I think maybe you're confused about the difference between the deficit and the debt. The deficit is the amount that we overspend each year and add to our total debt which is the overall figure that we owe (ie the 927bn which has accumulated from bailing out the banks plus being in deficit for a number of years)

So yes, the bank bailout has contributed a huge amount to our overall debt, but we already owed a lot of money before we even entered a recession (why? why were we spending more money than we were bringing in during an economic boom?)

And the real point is that we can't even begin to pay any of the debt back while we are still running a deficit. It's not until the deficit has been reduced to 0 that we will start repaying the total debt.

It is extremely important, you are right.

I think this is why we needed Ed Balls as Shadow Chancellor, he would have been all over this shit.

There is no way he would have let George Osborne pretend that the deficit was a result of Labour profligacy (profligacy which they were pledged to match pound for pound until very recently).

Labour have their share of the blame to shoulder for how the financial crisis played out, but given that the Tories wanted even more deregulation, we're bloody lucky it wasn't them in charge during the boom times.

I think you're also confusing 'support' for the banks with 'giving the banks money'. Of that £850bn, £76bn went on buying shares in RBS and Lloyds and £40bn was loaned to Bradford and Bingley and the Financial Services Compensation scheme. This added to the national debt but we will eventually get this money back when the shares are sold and the loan reimbursed. You're right... several hundred billion was was put up for liquidity support and to guarantee bank borrowing... but has not been 'called in' as it were. So it hasn't been spent, it's still there.

The difference between ongoing deficit and national debt has been explained above. It's our ongoing costs of running the country that are causing the current problems, not so much the one-off payouts made to banks.

'so are we being sold a totally artificial panic? It seems so'

I don't understand, do you think it is a conspiracy?

Yes, you are right, it is the debt that is supposed to be 927bn - and all caused by Labour's profligate spending on benefit cheats and layabouts and immigrants and whatever. But the confusion has been eagerly and dishonestly fed by the Conservatives who talk about deficit and debt, even in the budget speech in a manner that conflates the two.
According to the BBC, before the shit hit the fan (aka the global recession that started in the US) the UK actually had a comparatively low level of debt compared to other countries. news.bbc.co.uk/1/hi/business/8415703.stm
Now, I'm no economist, but I really do feel we have been fed the line that the debt is the result of a long-running deficit
of outrageous proportions (again, I read it was not considered particularly high in terms of international monopology money) and this is why we must take an axe to spending on the poor and disabled.

Of course I don't think it is a conspiracy! It's political - the Tories want to make us think they are riding to our rescue on the four horses of the apocalypse. It is a fantastic excuse to cut the welfare state to ribbons, something that is at the heart of Conservative thinking and always has been.

So you think that we should continue with running at a deficit every year?!

I am not confusing 'support for the banks' with 'giving the banks money' at all. I didn't use either of those phrases, so not sure why they are in quote marks. As I said, the roughly 850bn cost of the bank bailout is added to the figures for the national debt, account for nearly all of it, yet it is not real debt at all, and in fact the country may make a profit from it, yes?

'Of course I don't think it is a conspiracy! It's political'

Then why aren't Labour saying anything about it. Do you understand it, but they don't?

DaisySteiner, every other G7 country runs a deficit. This is something else we don't hear.

I don't know why Labour isn't getting this message out yet. The new Shadow Chancellor has been in the job for about five minutes (ditto the new leader), which might have something to do with it. Also the fact that he appears worryingly not on top of his brief, owing to not being Yvette Cooper.

Yes we do (well I knew it anyway!) They all need to cut theirs too. Even if you wipe that 850bn off the slate we are still overspending by a huge amount every year and that cannot carry on indefinitely.

Maybe Alan Johnson hasn't got to the page in his economics primer yet which talks about this kind of stuff?

But they knew the facts before the election, when Alistair Darling was in charge. They left a note saying "sorry, there's no money left". They have lots of think tanks and economists advising them. Fortunately, we don't need to rely on Alan Johnson, that would be like being up shit's creek without a paddle. What about economists like Stiglitz?

But Daisy, this is not the picture we have been given, in order to justify the scale of the cuts is it?
We are told our debt is £927bn, caused by excessive spending (subtext: on scroungers) and we are the only nation to run a deficit because of evil Labour.

I think the nation would react differently if we weren't so panicked by tales of a £927bn debt mountain.

Why aren't "evil Labour" telling us teh truth then? Are they that stupid?

Well you must read different newspapers and watch different current affairs programmes because I've never heard anyone claim we're the only nation to run a deficit. I've also heard it discussed lots about how much of the figure is to do with the bank bailout.

You're not answering the question though - do you think it's reasonable for us to have a deficit indefinitely?

Why aren't the Guardian informing us of the truth, if it is just a political trick by Osborne?

I am not at all sure that the Uk situation merits this kind of probably ill-though through panic cutting while the recovery is so shaky, and plenty of economists seem to agree it is a risky strategy economically, while of course being terrifying for the poor and disabled.

Have a look at this chart showing the government deficit and debt as a % of GDP.

2006 - 07 the deficit was about 2.5-3% of GDP and our debt was debt was 40% of GDP
2007 - 08 similar picture
2008 - 09 the banking crisis hits global trading, we bail out our banks. Deficit is now 7% of GDP and our national debt is 55% GDP
2009 - 10 post crisis, post bank bailout and now the deficit is a whopping 11.4% GDP and our debt is 70% GDP.

The question is ... why were we running a deficit between 2006 and 2008 when we were supposedly in economic boom? Why was the national debt still going up at that stage rather than coming down?

And you can see those blue lines on the chart.... those are the EU parameters for a well-run economy. Go over those lines by much and your country starts to look like a 'bad risk' (my quotes, not yours) and investors shy away.

Deficits & surpluses are a cyclical economic trend. As you grow your economy the deficit comes down, you go into surplus... when things cool down the suplus comes down the deficit increases. But when it's at 11.4% you can't combat that by natural economical swings and roundabouts and just wait for things to right themselves. That's where we're at now

So Claig, you don't think that of the £927bn debt over £850bn is the bank bailout, which is not true debt in the sense of being money that cannot be recovered? And that the BBC and the Office of National Statistics etc have just made it up?

Daisy, we have already agreed the that the level of debt is largely illusory (cost of bank bailout, so a paper debt) Deficits rise in economic hard times. Other G7 countries (all or most) also ran deficits during what we are now fondly calling the boom years. What has happened to Britain is not the exceptional cockup, unique to us, that the Conservatives are suggesting.