UK National Debt

The UK national debt is the total amount of money the British government owes to the private sector and other purchasers of UK gilts.

  • In April 2015, public sector net debt excluding public sector banks (PSND ex) was £1,487.7 billion (80.4% of GDP)
  • Source: [1. ONS public sector finances ] (page updated June 1st 2015)

public-sector-debt-ons

Budget deficit – Annual Borrowing

This is the amount the government has to borrow per year.

  • In 2012/13 net borrowing was £115bn (7.4%) (Excluding Royal mail and transfers)
  • In 2013/14 net borrowing is forecast at £105.5bn or 6.5% of GDP (Excluding Royal Mail and transfers)
  • In the financial year ending 2015 (April 2014 to March 2015), public sector net borrowing excluding public sector banks (PSNB ex) was £87.7 billion (4.8% of Gross Domestic Product (GDP)) a decrease of £10.8 billion compared with the previous financial year.
  • For the financial year ending 2015 (April 2014 to March 2015), the central government net cash requirement (CGNCR) was £93.6 billion;

UK Net borrowing

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Latest statistics at OBR

Note this graph excludes sale of Royal Mail which temporarily reduced actual borrowing in 2012-13

net-borrowing-96-12

Figures for 2013-14 onwards are forecasts.

View:  Latest statistics at OBR

Further reading on

Deficit down but Debt up?

One potential confusion is that politicians may say the budget deficit is coming down. But, at the same time, national debt is rising.

  • If annual borrowing falls from £80bn to £50bn, the annual deficit is lower. But, at the same time, the national debt (total debt) is still rising.

% of GDP

The most useful measure of national debt is to look at debt as a % of GDP. For example in 1950, UK national debt was £640bn (at 2005 prices) – but this was 250% of GDP.

 

 

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: Government 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 77% 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 120%.  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.

uk-national-debt
Source: Reinhart, Camen M. and Kenneth S. Rogoff, “From Financial Crash to Debt Crisis,” NBER Working Paper 15795, March 2010. and OBR from 2010.

See also: Historical National debt

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 current 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. In the current climate, the UK would struggle 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.

But, how did the UK reduce its debt so much from 1950 to early 1990s – despite rising levels of real government spending? – See:  how the UK reduced debt in the post-war period

 

Historical budget deficit

Annual borrowing since 1950

net-borrowing-55-14

Debt and Bond Yields

Bond yields reflect the cost of borrowing. Lower bond yields reduce the cost of government borrowing.

government-borrowing-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.

See also: Bond yields on European debt | (reasons for falling UK bond yields)

Cost of Interest Payments on National Debt

uk-debt-interest-payments-total

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.

debt-interest-payments-percent-gdo

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 will be impact of Chancellor’s plan to run budget surpluses?

Is it a good idea to enshrine in law the idea of a government being forced to run a budget surplus?

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
  • What are the prospects for UK debt default?

Debt including financial sector intervention

UK debt

Potential Problems of National Debt

  1. 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.
  2. Higher Taxes / lower spending in the future.
  3. Crowding out of private sector investment / spending.
  4. The structural deficit will only get worse as an ageing population places greater strain on the UK’s pension liabilities. (demographic time bomb)
  5. Potential negative impact on exchange rate (link)
  6. 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.

holdings-gilts-sector

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

Private sector savings

gross-saving

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

 

Government spending

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More statistics on UK government spending

Other Countries Debt

See also:

299 thoughts on “UK National Debt

  1. When you compare the UK debt problems to other countries, it really doesn’t seem that bad. Not good, of course, but it’s a reminder that there are MANY people who are worse off and struggling wit debt.

  2. The above article omits to mention that the real or inflation adjusted interest we pay on the debt is zero approximately.

    Another point that will have debt-phobes completely flummoxed is thus. If inflation is near zero and the real or inflation adjusted rate of interest paid on the debt is zero, then then the debt becomes the same thing as money (monetary base).

    1. You’re still paying a thousand pound a year out of every taxpayers money. But that’s okay because their wages are going up by that! Prick!

  3. So if we’re a trillion in debt and yet the government always pays its lenders on time, how come we’re a trillion pounds in debt??

  4. I am impressed with the clarity of your explanations. However, one thing that eludes me is in connection with the so-called National Debt, currently running at over £1.5 trillion (gross). About a quarter is due to the Bank of England (£375 billion) and arises from QE. The rest is due to Overseas Lenders, Insurance Companies and Pension Funds, Building Societies, Investment Trusts, Local Authorities and Public Corporations and Private Individuals. But I can’t seem to find out exactly what is due to each of these categories. Am I being stupid?

    Even a FOI request to HM Treasury hasn’t helped. Why is it a secret?

    1. Martin , under some agreed convention Govt are barred from printing currency. So the £ 375 billion QE debt held by the BOE will need to be repaid by the govt. and the QE will be extinguished . Therefore the govt will need to find money to do this.

  5. Hi, just want to say that I have stumbled upon this page, and found it to be very succint in explaining how government debt works!

    I have one quick question though; what determines the rate of interest (or yield) that the government pays on its gilts? Do credit rating agencies play a part? Or is it simply demand and supply?

    If bond yields increase, does that have an effect on bond rates in general?

  6. Debt interest seems, at first, to be just an expense, but it is INCOME to those who receive it.

    Payment of interest just shuffles money around, it doesn’t consume resources.

  7. I thought the article was really good until I reached the line where you said, “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”. Then I had to chuckle. It’s a bit like me saying I’ve put money aside supposedly for my child’s university education, spent it on whatever, and I don’t have a problem!?!

    On the last figures I saw, the OBR estimate for total government pension obligations was well north of £5 trillion which are presently being funded at a rate of 6% up until late 2013. Of these public sector employee pension liabilities are only being funded at around 58% of GDP. As well you seem to have left out social security related liabilities that are unfunded are estimated still in the range of £3.8 billion. I seriously question from where you think the money to pay for this is going to come especially as household debit is close to 100% of UK GDP? These numbers are as bad as many of the other usual suspects (i.e. the PIIGS) in the EU. It’s only that because of the Greek drama (and interests rates are abnormally low due to QE) that no one is actually paying attention to it!

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