The UK national debt is the total amount of money the British government owes to the private sector and other purchasers of UK gilts.
- Public sector net debt was £1,231.7 billion at the end of November 2013, equivalent to 76.6% of GDP
- Source: ONS [1. ONS public sector finances ] [This figure excludes temporary effects of financial interventions (PSND ex) (page updated Jan 7th 2014)
- In 2012/13 net borrowing is forecast to be £116.5 billion bn (7.6% of GDP) - note: this excludes a £28bn transfer of Royal Mail pensions in April 2012 and £6.4 bn because of transfer of funds from AFP, Q.E. The official figure including Royal Mail and AFP transfers is £ 80 billion (5.1% of GDP).
- See also: UK budget deficit
Gross Government debt
Although it is a little confusing, a different debt statistic is also produced. Gross government debt is calculated in a different way and includes public sector debt plus some government liabilities, social security funds, and local government debt (see also: gross government debt)
- In 2012/13, gross government debt is forecast to be £1,412 bn or 90.3% of GDP [2. HM Treasury Public Finance statistics]
- In 2012/13, public sector net debt is forecast to be £1,186 bn or 75% of GDP.
If all financial sector intervention is included (e.g. Royal Bank of Scotland, Lloyds), the Net debt was £2311.6 billion (147.3 per cent of GDP (2012). This is known as the unadjusted measure of public sector net debt.
Recent History of UK National Debt
After a period of financial restraint, from mid 1990s, public sector debt at a % of GDP fell to 29% of GDP by 2002. From 2002 – 2007 , national debt increased to 37 % of GDP. This increase in debt levels occurred despite the long period of economic expansion; it was primarily due to the government’s decision to increase spending on health and education (see: Gov’t spending in this period). There has also been a marked rise in social security spending.
Since 2008, public sector debt has increased sharply because of:
- 2008-13 recession (lower tax receipts, higher spending on unemployment benefits) The recession particularly hit stamp duty (falling house prices) income tax and lower corporation tax.
- These cyclical factors have also exposed an underlying structural deficit. (deficit caused by spending greater than tax, ignoring cyclical factors)
- Financial bailout of Northern Rock, RBS, Lloyds and other banks.
Comparison With Other Countries
Although 73% of GDP is a lot, it is worth bearing in mind that other countries have a much bigger problem. Japan for example has a National debt of 225%, Italy is over 100%. The US national debt is close to 75% of GDP. [See other countries debt]. Also the UK has had much higher national debt in the past, e.g. in the late 1940s, UK debt was over 180% of GDP. Nevertheless, there are reasons why the UK couldn’t borrow the same sums that we did post-war.
History of National Debt
UK National Debt since 1900.
National Debt since 1922. Source: HM Treasury and UK Public Spending 
These graphs show that government debt as a % of GDP has been much higher in the past. Notably in the aftermath of the two world wars. This suggests that UK debt is manageable compared to the early 1950s. (note, even with a national debt of 200% of GDP in early 1950s, UK avoided default and even managed to set up the Welfare State and NHS. However, in the current climate, the UK wouldn’t be able to borrow the same as in the past. For example, private sector saving is lower, and the US wouldn’t give us big loan like in the 1950s.
Debt and Bond Yields
Since 2007, UK bond yields have fallen. Countries in the Eurozone with similar debt levels have seen a sharp rise in bond yields putting greater pressure on their government to cut spending quickly. However, being outside the Euro with an independent Central Bank (willing to act as lender of last resort to the government) means markets don’t fear a liquidity crisis in the UK; Euro members who don’t have a Central Bank willing to buy bonds during a liquidity crisis have been more at risk to rising bond yields and fears over government debt.
Cost of Interest Payments on National Debt
The cost of National debt is the interest the government has to pay on the bonds and gilts it sells. In 2011/12, the debt interest payments on UK debt are anticipated to be £48.6 bn (3% of GDP). This is a sharp increase from two years ago, but still quite manageable. See also: UK Debt interest payments
As a % of GDP, debt interest payments are relatively low.
In 1985-86, debt interest payments reached 4.5% of GDP
How to reduce the debt to GDP ratio?
- Economic expansion which improves tax revenues and reduces spending on benefits like Job Seekers Allowance. The economic slowdown which has occurred since 2010 has pushed the UK close to a triple dip recession and therefore the further squeeze on tax revenues has led to deficit reduction targets being missed.
- Government spending cuts and tax increase (e.g. VAT) which improve public finances and deal with the structural deficit. The difficulty is the extent to which these spending cuts could reduce economic growth and hamper attempts to improve tax revenues. Some economists feel the timing of deficit consolidation is very important, and growth should come before fiscal consolidation.
- See: practical solutions to reducing debt without harming growth
What is the Real Level of UK National Debt?
It is argued by some that the UK’s national debt is actually a lot higher. This is because national debt should include pension contributions and private finance initiatives PFI which the government are obliged to pay.
The Centre for Policy Studies (at end of 2008) argues that the real national debt is actually £1,340 billion, which is 103.5 per cent of GDP. This figure includes all the public sector pension liabilities such as pensions, and private finance initiative contracts e.t.c (and Northern Rock liabilities).
- However, these pension liabilities are not things the government are actually spending now. Therefore, there is no need to borrow for them yet. It is more of a guide to future public sector debt. I don’t accept the fact that future pension liabilities should be counted as public sector debt. In 2006, the Statistics Office did change calculations to include some PFI into public sector debt figures [pdf - Treasury.gov.uk]
- However, it is a sign that it will be difficult to improve finances in the future.
Another problem is that with the financial crisis, the government have added an extra £500bn of potential liabilities. Note: the Government has offered to back mortgage securities. They are unlikely to spend this money. But, in theory the government could be liable for extra debts of up to £500bn. If we include this bailout package as a contingent liability National debt would be well over 100% of GDP. However with a modest improvement in the bank sector, the necessity for these bailouts look unlikely, unless there is a very sharp deterioration in global finance markets – which is always possible.
Forecast for National Debt
- Current forecasts for UK debt predict that the UK public sector debt to GDP ratio will peak at 79.9% in 2015/16. However, in the past few years, government forecasts have regularly been revised upwards due to poor growth and disappointing deficit reduction
Debt including financial sector intervention
Potential Problems of National Debt
- Interest Payments. The cost of paying interest on the government’s debt is very high. In 2011 Debt interest payments will be £48 billion a year (est 3% of GDP). Public sector debt interest payments will be the 4th highest department after social security, health and education. Debt interest payments could rise close to £70bn given the forecast rise in national debt.
- Higher Taxes / lower spending in the future.
- Crowding out of private sector investment / spending.
- The structural deficit will only get worse as an ageing population places greater strain on the UK’s pension liabilities. (demographic time bomb)
- Potential negative impact on exchange rate (link)
- Potential of rising interest rates as markets become more reluctant to lend to the UK government.
However, Government Borrowing is not always as bad as people fear.
- Borrowing in a recession helps to offset a rise in private sector saving. Government borrowing helps maintain aggregate demand and prevents a fall in spending.
- In a liquidity trap and zero interest rates, governments can often borrow at very low rates for a long time (e.g. Japan and UK) This is because people want to save and buy government bonds.
- Austerity measures (e.g. cutting spending and raising taxes) can lead to a decrease in economic growth and cause the deficit to remain the same % of GDP. Austerity measures and the economy | Timing of austerity
Who Owns UK Debt?
The majority of UK debt used to be held by the UK private sector, in particular, UK insurance and pension funds. In recent years, the Bank of England has bought gilts taking its holding to 25% of UK public sector debt.
Overseas investors own about 30% of UK gilts.
More at: who owns UK debt?
Total UK Debt – Government + Private
- Another way to examine UK debt is to look at both government debt and private debt combined.
- Total UK debt includes household sector debt, business sector debt, financial sector debt and government debt. This is over 500% of GDP.Total UK Debt
UK Budget Deficit
The UK budget deficit is the annual borrowing requirement. It is measured by public sector net borrowing.
More on the annual budget deficit
Private sector savings
When considering government borrowing, it is important to place it in context. From 2007 to 2012, we have seen a sharp rise in private sector saving (UK savings ratio). The private sector have been seeking to reduce their debt levels and increase savings (e.g. buying government bonds). This increase in savings led to a sharp fall in private sector spending and investment. The increase in government borrowing is making use of this steep increase in private sector savings and helping to offset the fall in AD. see: Private and public sector borrowing
More statistics on UK government spending
Other Countries Debt
- Should we worry about National Debt?
- The biggest lie in UK politics? – Is the debt issue exaggerated?
- Should the pace of the UK’s deficit reduction be slower?
- How much can a government borrow?
- US National Debt
- Books on Debt at Amazon.co.uk
- Problem of Personal Debt in the UK
- How is National Debt financed?