BRIEFING - THE DANGEROUS FICTION OF THE “FISCAL BLACK HOLE” - HOW ARBITRARY TARGETS AND UNCERTAIN FORECASTS ARE DRIVING

The rate of future economic growth, the level of future interest rates, and the nature of the fiscal target will dramatically alter the size of the so-called fiscal ‘hole’. [...] Given a stock of government debt at the end of a period of time (usually the end of a fiscal year, which is measured from the start of April to the end of the following March) we want to know how much the stock of debt will have increased by the end of the next period (e.g., the end of the next fiscal year). [...] Figure 1: The mechanics of an increase in government debt In order to calculate how the debt stock will change between one period and the next, we therefore need to know three things: the size of the debt stock, the interest rate on the debt, and the primary deficit. [...] For example, if the public debt at the end of last year was £100bn, the interest rate on that debt is 3%, and the primary deficit over the course of this year is £5bn, then the debt stock will increase by £8bn over the course of this year (£3bn of interest payments plus the £5bn primary deficit), resulting in a debt stock at the end of this year of £108bn. [...] If we want to know what will happen to the debt, the deficit, and interest payments as percentages of GDP, we need to know the following: the current debt-to-GDP ratio, the expected path of the primary deficit-to-GDP ratio, the expected interest rate on government debt, and the expected growth rate of GDP.