Sector Net Cash Requirement (PSNCR) is the combined financial deficit of
central government + local government + the public corporations. It measures
the annual borrowing requirement of the government sector in the economy.
government is running a budget deficit it means that total public expenditure
exceeds revenue. As a result, the government has to borrow through the issue
of government debt.
government sector is taking in more revenue than it is spending, there is a
budget surplus allowing the government to repay some of the accumulated debt,
of perhaps cut the burden of tax or raise government expenditure.
that the government has to borrow each financial year can be measured in a
number of ways:
Nominal PSNCR - is
the total borrowing requirement in money terms making no adjustment for the
PSNCR as a % of GDP
gives economists a good measure of the scale of the debt problem that may
PSNCR takes into account the effect the economic cycle can have on the
PSNCR. For example, in a recession the PSNCR nearly always rises
automatically because of higher benefit payments and reduced tax revenues.
A HIGH LEVEL OF GOVERNMENT BORROWING MATTER?
important question is what central government does with the money it has
borrowed. When funds are allocated to public sector capital investment in
roads, schools, hospitals and other items of infrastructure this enables the
nation to increase the output it can produce. This will make it easier to pay
off previous debts or to pay the interest on them.
budget deficit has to be financed - normally through the issue of new
government debt to the capital markets. For a government with a good credit
rating, the sale of new debt is rarely a problem. Most financial institutions
are happy to purchase debt because they regard them as assets on their
balance sheets. Secondly if there is a large pool of savings in the economy,
the issue of government debt (which soaks up some of these savings) will have
little impact on the ability of private sector businesses to find sufficient
funds to finance their investment.
some economic risks associated with a high level of government borrowing:
- If the economy has only a small supply
of savings, increased government borrowing may force up interest rates and
crowd out private sector investment
- Higher borrowing in the long-run
requires an increase in the tax burden - this may dampen demand and
- If the national debt increases, annual
interest payments on the debt goes up - money that might have been spent
in priority areas
TRENDS IN UK GOVERNMENT BORROWING
The chart shows the fluctuations in government borrowing over the last thirty
years. Small budget surpluses in the late 1980s were the result of very
strong economic growth. But the recession in the early 1990s saw a return to
historically large budget deficits.
has experienced sustained economic growth and falling unemployment since 1993
and this, together with a range of tax increases and better control of
government spending, has seen a sharp improvement in government finances. A
budget surplus is forecast for 1999-2000 and in subsequent years.
GOLDEN RULE FOR GOVERNMENT BORROWING
Brown introduced the Golden Rule in his first budget statement in July 199.
When a government borrows only to finance investment and not to fund day to
day spending, it is following the Golden Rule.
spending on current goods and services and social security benefits must be
met by revenue from taxes, but investment for the future (asset accumulation)
can be met by borrowing.
AND CYCLICAL BUDGET BALANCES
recession / slowdown phase of the economic cycle government finances worsen
because tax revenues slow down and social security payments start to rise.
The structural budget balance seeks to make an adjustment for the effects of
the economic cycle.
above shows the annual structural budget balance for the UK using OECD
estimates. The UK has run a structural deficit in each year although the
forecast for 1999 is the lowest yet. This suggests that steps to control
government spending have been successful. Tax revenues have also grown
considerably - in part because of the introduction of self-assessment a few