Monday 27 August 2012 9:36 pm

Misinformed public remain confused by the debt and deficit

THE coalition’s plans for the public finances seem doomed to fail. Both parties came into office pledging to eliminate the current structural deficit in five years, and for the debt-to-GDP ratio to be falling by the end of the Parliament. In effect, this meant faster deficit reduction than the Labour party had outlined under Gordon Brown.However, now the budget deficit is falling almost as slowly as Labour planned. Current spending continues to increase in real terms, and the 25 per cent deficit closure that occurred by the end of 2011/12 was driven by cuts to investment and economically damaging tax hikes. The current structural deficit, which the coalition pledged to eliminate, has only been reduced by 13 per cent. Slower than expected growth means public sector net debt is now officially forecast to be £1,365bn by the end of the Parliament, £81bn higher than originally planned. And recent borrowing figures suggest it will be much higher still.For these reasons, the public finances take centre stage in political debate. But how tuned in are the public to what the coalition actually set out to achieve, and how successful the coalition has been so far?Some polling we’ve done suggests: not very. In fact, worryingly, it suggests many in the public don’t know the difference between debt and deficit – which could easily be exploited in future election campaigns. Just 10 per cent of those surveyed realise that, on official forecasts, the coalition government is planning to increase the national debt by around £600bn between 2010 and 2015. In fact, 47 per cent of the public incorrectly thought it intended to reduce the national debt by the same amount, while 32 per cent simply didn’t know.Of course, it was never the coalition’s ambition to reduce the debt this Parliament in money terms, or as a proportion of GDP. We keep adding to the debt all the while we run a deficit, which looks like it will be well into the next Parliament. It doesn’t help that many politicians and commentators regularly confuse the debt and deficit. As such, it makes sense for coalition ministers to simplify matters by saying we are “paying off the nation’s credit card”.The public also seem unclear about what the government has actually achieved. The coalition correctly states that the deficit has fallen since 2010, even if more slowly than expected. But just 39 per cent agreed with the statement: “The government has reduced its budget deficit since 2010”, compared to 28 per cent who disagreed and 33 per cent who didn’t know.Ignorance of the public finances makes changing course more difficult, but unless we see a surprise uplift in the economy in the next few months, there seems little economic or political payoff to stick to status quo policies.I think actual spending cuts, alongside tax cuts and significant supply-side reforms are the best hope for the economy. If the chancellor agrees, then it’s clear winning the argument will require more clarity about the true state of the public finances, and the aims of changing tack.Ryan Bourne is head of economic research at the Centre for Policy Studies.

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