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 (e.g. Bank of England).

• In Jan 2024, UK public sector net debt was  £2,685.6 billion or 97.7% of GDP
  
• This is the highest level of public sector debt since 1961.
• The OBR have forecast substantial rises in UK debt over the coming decade because of demographic factors, putting strain on UK spending.
• Source: [1. ONS public sector finances,- HF6X] (page updated 13 Feb 2024)

Source: ONS debt as % of GDP – HF6X | PUSF – public sector finances at ONS

Reasons for National debt

• Enables the government to spend more during periods of national crisis, e.g wars, pandemics, and recessions.
• In a recession, the government will automatically receive lower tax revenues (less VAT and income tax) and will have to spend more on benefits (e.g. more unemployment benefits) This causes a cyclical rise in debt.
• Extra government borrowing during a recession can help provide fiscal stimulus to promote economic recovery. By borrowing and then spending more, the government is injecting demand into the economy and this can help to reduce unemployment. This is known as fiscal policy and was advocated by J.M. Keynes.
• Strong market demand for government debt. Private investors buy gilts because they are seen as risk-free investments and there is also an annual dividend from the bond yield. Since 2009, there has been strong demand despite very low-interest rates, meaning the government can borrow very cheaply.
• Finance investment. The government could borrow to finance public investment projects that can lead to higher growth in the future.
• Political convenience. There is usually political pressure to cut taxes and increase government spending. Allowing debt to rise can be a way for the government to avoid difficult choices.

Forecast for the National debt?

Source: Fiscal risks and sustainability – OBR

The OBR have forecast that, on our given trajectory, UK public sector debt could reach 350% of GDP within 50 years. The pessimistic outlook for national debt is made because

• An ageing population and demographic changes will put increased pressure on government spending, notably health care and pension spending.
• A smaller working population will limit UK’s productive capacity.
• Stress on finances from geopolitical events, such as frostier relations with China, Russia and the Middle East.
• Higher energy prices
• Costs of climate change.
• Declining tax revenues from petrol in a decarbonising economy.
• Low productivity growth of UK since the financial crash of 2009
• Recent boost to debt from the financial crisis and one-off cost of Coronovirus pandemic, which cut tax revenues and required government support for lockdown measures.

UK debt in context

Predicting debt for the next 50 years is difficult since we don’t know what kind of productivity improvements may come, e.g. continued gains in renewable energy may reduce the burden of higher oil and gas prices. Equally, the costs of environmental change could be worse.

History of the national debt

Main article: History of UK national debt

UK national debt since 1900

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

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 the 1950s, UK avoided default and even managed to set up the welfare state and NHS.

Debt reduction and growth

The post-war levels of national debt suggest that high debt levels are not incompatible with rising living standards and high economic growth.

• The reduction in debt as a % of GDP 1950-1980 was primarily due to a prolonged period of economic growth. See:  how the UK reduced debt in the post-war period
• This contrasts with the experience of the UK in the 1920s when in the post First World War, the UK adopted austerity policies (and high exchange rate) but failed to reduce debt to GDP. Debt in Post-First World War period.

Budget deficit – annual borrowing

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

• In the financial year of 2021, PSNB ex was estimated to have been £146.8 billion.

Annual borrowing since 1950. Figures for 2023-24 are forecasts (and rather optimistic!)

Debt and bond yields

Bond yields a the interest that the government pay bond/gilt holders. It reflects the cost of borrowing for the government. Lower bond yields reduce the cost of government borrowing.

Since 2007, UK bond yields have fallen. Countries in the Eurozone with similar debt levels saw 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

The cost of National debt is the interest the government has to pay on the bonds and gilts it sells. According to the OBR  in 2022-23, debt interest payments will be £83 billion. (2.5% of GDP) or 5.2% of total spending. It is lower than in previous decades because of lower bond yields.

See also: UK Debt interest payments

The era of low interest rates post 1992 has helped to reduce UK debt interest payments as a ratio of government revenue. However, with interest rates and borrowing set to soar (2022/23, these predications will need to be revised upwards considerably.

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 the 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 the 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.

Source: DMO Debt Management Report 2022/23

• Overseas investors own about 28% of UK gilts (2022).
• The Asset Purchase Facility is purchases by the Bank of England as part of quantitive easing. This accounts for 26% of gilt holdings.

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

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 has 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

Comparison with other countries

Although 107% of GDP is high by recent UK standards, it is worth bearing in mind that other countries have a much bigger problem. Japan, for example, has a National debt of 256%, Italy is over 157%.  The US national debt is over 132% of GDP. [See other countries debt].

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 into a period of slow economic growth – especially if we consider GDP per capita growth. Therefore the further squeeze on tax revenues has led to deficit-reduction targets being missed.
• Government spending cuts and tax increases (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

Other countries debt

See also:

• How much can a government borrow?
• Books on Debt at Amazon.co.uk
• How is National Debt financed?
• Net migration and public finances