Spring Statement: Is the chancellor right that debt is shrinking?

From BBC - March 13, 2018

Chancellor Philip Hammond has been talking a lot about debt falling.

In his Spring Statement, he referred to the predictions from the Office for Budget Responsibility, saying "it forecasts... a shrinking debt".

He also referred to the country expecting "the first sustained fall in debt in 17 years".

But, confusingly, when he says debt is expected to fall he does not mean that the government will owe less money.

The figure for debt that he is using is the total amount the government owes divided by gross domestic product (GDP), which is a measure of everything produced by the country in a year.

You can see from the chart above that debt as a proportion of GDP is indeed expected to fall for the next five years, as indeed it was at the time of the Budget in November.

Why does it make sense to talk about debt as a proportion of GDP?

Well, total debt in the UK economy is about 1.8 trillion. The national debt in the US is about $20tn, but that does not mean that the debt problems in the US are 10 times as severe as the UK because it has a bigger economy so can afford to be in more debt.

But debt as a proportion of GDP may be falling while the actual cash value of that debt in billions of pounds is growing.


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