UK Public Finances Explained: What the Confusing ONS Data Means

Sometimes it's hard to tell if you're reading the public sector finance data from the Office for National Statistics or have plucked the brain from your skull and dropped it into the whirring jaws of a blender.

There's something hypnotically paralysing about the pages and pages of number-splattered jargon, a confusing medley of unfamiliar words and abstract digits.

So here's an attempt, for the writer's own benefit as much as the reader's, to make sense of the muddle that is public sector finance data.

Let's focus on the most important numbers from the latest release in August: current budget deficit, net borrowing, and net debt.

There are two things worth noting. Firstly, the ONS says not to draw conclusions from a single month's data because this is too short a timescale and subject to sudden one-off occurrences that would disguise the bigger picture. So we'll look at the year-to-date figures, as the ONS recommends.

Secondly, these figures do not take into account the stakes in banks owned by the public sector following the financial crisis, when big institutions such as the Royal Bank of Scotland had to be bailed out by taxpayers. These, though significant, are considered anomalous and not representative of day-to-day public sector finances.

Current Budget Deficit

Put simply, this is the difference between the government's income and outgoings. At the moment the country is in deficit – more is spent than comes in. In order to meet its spending commitments then, the government must borrow money to plug the gap, which adds to the country's debt pile – more on that later.

The deficit has been the subject of a fierce political debate in the UK. Chancellor George Osborne is trying to bring public finances back to a surplus – more coming in than going out – and to do this he is cutting back on public spending.

Critics say he is cutting too much and too quickly. They argue he should instead raise taxes for the wealthiest in society and protect welfare spending and other budgets. Osborne is cutting taxes for companies, something he believes will spur on economic growth and so actually bring in more money to the Treasury rather than less.

From the ONS release, we can see that the current budget deficit is £36.4bn from the start of the fiscal year in April to the end of August. This is 0.1% lower than the same period a year before.

As a percentage of GDP, the value of output from the UK economy, the UK's fiscal deficit was equivalent to 6.5% in the 2013/14 year. Osborne hopes by the end of 2014/15 to have got this down to 5.5%. He wants to reduce it every year until 2018/19, when he – if still chancellor – wants to have overseen the UK's public finances into a surplus.

This is behind his original target when he first took office of erasing the deficit by the end of the parliament in 2015, but the eurozone crisis and a weak UK economy got in the way.

Net Borrowing

This is the amount of money the government has had to borrow in order to fund its spending. Also recorded under this heading is the amount of revenue the government has made through, for example, tax receipts, as well as its expenditure.

If the revenue doesn't match the amount being spent, the government has to borrow because it has a deficit (see above).

For the fiscal year-to-August, the UK government has had to borrow £45.4bn. This is £2.6bn higher than in the same period a year before. Its receipts, from things like VAT and income tax, were £240.6bn – 1.2% lower than a year before. But its expenditure was much higher, at £273.5bn, after rising 1.3% annually.

There is a mixture of factors coming into play here that fluctuate from month to month. The government received less in income tax because firms delayed bonus payments to time with a cut in the rate, meaning staff would take home more of what they were awarded.

And the government also got less in coupon payments from the Bank of England, which has been buying up hundreds of billions of pounds in gilts – bonds issued by the UK government to borrow money from the markets – to help stimulate the weak economy.

For expenditure, the government had to pay 2.5% more on its public sector debt over the period - £22.1bn in all – and social spending, such as on pensions went, up by 1.9% to £82.2bn.

Net Debt

This is fairly self-explanatory. It is the amount of debt held by the public sector as a whole. It is the UK public sector's financial liabilities, like the money it has received in outstanding loans through selling gilts and so still owes.

The larger the debt, the more public money that has to be spent on paying the interest on it. It means some of the money coming in through taxes has to be spent on debt repayments rather than key public services.

Most people agree that there's nothing wrong at all with a government borrowing. But in the past borrowing has been used to fund things like welfare payments rather than just things like infrastructure projects, which have the potential for multiple economic returns.

Because the UK has a deficit in its public finances, every month the debt pile gets bigger. By the end of August 2014, public debt had risen by 7.2% over the year to £1.432tn. Yes, trillion.