Governments are quite happy if people confuse these two terms. If government proposes to be less in debt on its year accounts than last year, it can say proudly that it is reducing the deficit and people think it's reducing the debt. Of course, that's not the case. If government is less in the red this year than last, it's still in the red, still creating a deficit which will go to increase the accumulated debt.
If government were to achieve a balanced budget in any year, they'd no doubt be trumpeting their success. But even a zero deficit on this year's account doesn't reduce the overall debt.
The only way to reduce the accumulated debt is by government showing a… no… not the "S" word… but unfortunately yes, the only way to reduce the debt is for government to run a Surplus each year until the debt is gone. And no government that hopes to get re-elected (and which party doesn't?) would so strain its relationship with its voters.
So what's to do?
The answer lies in another word which no government likes to mention – it begins with "P" and you'll never hear any government mention it. But more of that later. For the moment, well, is government debt so bad anyway?
Individuals know they can't go into debt indefinitely. So does any business – it can string along for a year or two if it's big enough, but ultimately it has to call in the receiver and declare bankruptcy. But governments seem to regard themselves as being on some magical cloud, unaffected by the rules to which ordinary mortals are subject. And we "the people" go along with that, first because most people only know what governments tell them, and second because it suits us all to consume more in government goodies than we give them in taxes. Of course there's always the "we're putting the debt on our children" warning, but that's only for goody-goodies who eat organic food and don't fly because it creates too much pollution.
Is it really bad for governments to go into serious debt?
As with most things, there are various degrees of "bad". And various degrees of danger to go with them.
Of course, being in surplus is great, but for most of us, jogging along in near financial balance is good enough.
Governments regularly have debts which they finance with IOUs – more tastefully known as Government Bonds. Cautious elderly folk buy them as a means of what they consider secure savings (if their bonds are yielding 3% and inflation is 4% that's not very secure, but better not tell them). Foreigners and investment funds buy them too. This can go on without any problems, governments issuing new bonds as the old ones fall due, bond yield rates varying with the economy at the time. Bond yields are the interest government has to offer to tempt buyers.
In 2008 something happened which had not happened since 1929. People began to question the security of their bank. Then it got worse, as governments rushed to secure the banks and people began to question whether even government could be trusted with their money. Oh, what sacrilege! And a cause for concern too of course. If you can't trust the government with your money what next?
This sense of insecurity and growing lack of trust in the mounting debts of governments prompted savers and investors to demand higher interest rates if they were going to lend governments their money. And the bigger buyers went for shorter term loans too – "We'll buy your bonds for a year, but 5 years is too risky".
The Euro currency countries, politically motivated still in a flush of Euro-enthusiasm, are trying to do the economically impossible: having countries sharing a common currency but without coordinated economic and budgetary management. So the Germans pursue strict budgetary disciplines, while the Greeks not only spend as if there's no tomorrow, they fudge the figures as well. The two countries may share a common currency, but investors quite reasonably demand a higher premium to buy dodgy Greek bonds than secure German bonds. The more you go into debt, the more interest you have to pay on your debt, which of course makes it even more difficult to balance the books.
So it's back again to the question: what's to do? And inevitably we have to confront the "P" word.
Governments have us well trained with their smooth slogans and slick sound-bytes, which we dutifully copy and repeat like good school children. It goes like this and it's very simple. If we're in debt and want to get back into balance we have two choices: increase taxes, or reduce public spending on government services. They don't mention it, but there is a third option – yes, its the "P" word. Time to reveal… it stands for "Productivity", the art or science of giving the customer, or in government's case the citizen tax-payer, better goods and services tomorrow at less cost than yesterday. An idea which of course strikes terror into the heart of any government employee.
And yet for the rest of us it's pretty much everyday stuff. In the home we're pleased when we find a better way of doing a regular chore so it takes less time and effort. And for businesses large and small, it's a constant challenge to keep up, because if your product isn't better or cheaper tomorrow and your competitor's.… you could be out of business. For any business it's a constant worry in the back of the mind: can I improve productivity or my product design or my customer service, and ifpossible reduce my prices?
For a fortunate minority this need not apply. Monopolies are in the fortunate position of having a captive customer base, so they can treat you how they like. Ma Bell, America's monopoly phone company for many years, became synonymous with bad uncaring service. And when the GPO was Britain's only phone company, well you took your turn to get a phone, and it came in any colour as long as it was black.
But the big utilities, the phone company, the gas, the electricity supplier, though they may be monopolies with no competition they are not forced monopolies. No one is compelled to use electricity or gas or to have a phone. If you don't like the way the phone company treats you, you can always pull it out, open the window and shout. Inconvenient of course, but you do have the option. These days of course, static phones compete with mobiles, and with cable companies which also offer phones. But the basic fact remains, even utility monopolies are not enforced monopolies. You can always opt out if you feel strongly enough.
But not so with government. Governments are unique in that they are not only monopolies, they are enforced monopolies. You can't opt out of government. Just try it. Try opting out of taxes. The heavies will soon come round and distrain upon your goods and chattels. So it's hardly surprising that governments display all the faults of monopolies and much more: the arrogance, the indifference to their citizen-customers, the complete disregard for quality and value in their services coupled with a total unawareness of any semblance of meaningful accounting.
Perhaps it is only now, faced with a growing mountain of debt in a world becoming increasingly questioning of government credit-worthiness, that governments will finally be forced to confront the "P" word and start to get their acts together.
The goal is not to raise taxes, nor to slash services, but to make government work better. Over the past twenty years just about every part of the world economy has been transformed by technology and new ideas, yet no sector anywhere has changed less than government.
Government accounts, for a start, are totally meaningless to anyone conversant with company accounting procedures. What pass for accounts are vague estimates, fudged by transfers between departments, and budgets set as targets which are never adhered to.
The remedies are fourfold.
One: commission a major firm of internationally recognized accountants to put government's accounts on a standard business footing. Then put every detail online, down to the last penny (if you dare).
Two: separate-off infrastructure administration and the major welfare services of education, healthcare and pensions so that each can then be reviewed individually.
Three: ruthlessly prune the grants, projects, pseudo-government appendages… anything not directly essential to the process of governance. Be ready to question the current usefulness of departments set up long ago and hanging on out of tradition and nostalgia - or simply lack of serious questioning.
Four: subject what remains to a time-and-motion study. Identify the objectives of each department, institute a measure of its success or failure, then ensure that it meets and exceeds its targets with the maximum efficiency and the minimum of expenditure.
Only then will governments get their finances in order, and begin to restore their battered reputations.
PROTECTION WITHOUT OPPRESSION. The Principle of Non-Injury protects its citizens and their property, and imposes a culture of fair trading. But the other side of the coin requires government to do its job without itself causing imposition through its costly incompetence.
