The National Debt, What is it in Layman’s Terms?
Do you really understand what the National Debt is? A recent Channel 4 Programme actually revelad that a number of MPs do not understand this so it is hardly surprising if members of the public are confused. The best way to understand it is to think of it as a mortgage (probably best seen as a Commercial Mortgage) on a Property.
At present in simple terms the National Debt is just over £900 billion. So that represents the mortgage capital. What then is the figures of about £150 million you hear talked about and described as the Deficit? That is the amount each year that the Government overspends.
So if you had a commercial mortgage that you were repaying over 15 years and your payments each year were £5,000 but you only paid back £4,000 you would have a deficit of £1,000 to be added to your capital.
In the case of the Government they get in tax income of say £600 billion and if they spend £799 billion then the extra £100 billion has to be added back to the Capital. So if the debt starts at £900 billion in 2011 and by the end of the year we have over spent £100 billion then the capital on your commercial mortgage is now £1 TRILLION.
You do not have to be Adam Smith to see that at these rates of overspend you are quickly going to get a “mortgage” that is out of control very quickly because your debt is increasing by over 10% in just one year.
Why is this suddenly a problem if we have been consistently overspending every year since 1997, There are a number of reasons that can be summarised as follows using again the analogy of a mortgage.
If the debt on a mortgage increases but the Lender believes that you are able to meet the new debt because your income has increased even further or the capital value of your property has shot up they may well be happy to allow you to have more debt.
If the Lender loses confidence that you can afford the new mortgage repayments then they will want to review your mortgage arrangements.
In the case of both Britain and the Eurozone the recession has meant that their income and capital values have fallen so that the Lenders in the market no longer have faith in their abillity to repay the loans due. Because we do not have a fixed term mortgage but need to borrow on a regular basis the Lender can suddently increase interest rates on the new borrowings and make the situation even worse.
So we can no longer afford to keep running a deficit every year and adding to the National Debt but have to find a repayment plan for our National Mortgage that the Markets will believe in. If we do not find that plan then we could find our house being repossessed and that is the reason why the National Debt is now such a problem for us.