Total UK Debt

• When examining debt levels in the UK, there is government debt – measured by public sector borrowing (often referred to as National debt). See: UK National Debt.
• We also have private sector debt which is composed of personal loans, personal mortgages, business debts, and debts of the financial sector.
• You could say total Debt includes both private sector debt plus government debt. Though bear in mind, there is not an exact statistic and it could involve double counting. It is also not measured consistently
• Private sector debt can be split up into
  • Household debt – personal loans
  • Non-Finance corporates – Company debts
  • Financial – debts of banks and financial corporations

Private Sector Debt

Credit to Private Sector

Fred – Household

Total Credit to Households

Series discontinued after 2017

Government debt

• Household + non-financial corporate debt (“private non-financial sector debt”) has in some years reached roughly 150% of GDP.

• “Credit provided by the financial sector” (a proxy for financial-sector scale) has, historically, exceeded 200% of GDP during peaks.

• Government gross/net debt has at times got close to 100% of GDP

This suggests total debt is around 450% of GDP but that would double-count many internal liabilities (e.g. inter-bank loans, bank deposits, corporate loans from banks, government debt held by financial institutions, etc.). So that “total” isn’t so meaningful

A meaningful “total debt of UK” would require:

• Consolidation across sectors (households, corporates, government, financial institutions)
• Excluding intracountry claims (to avoid double-counting)
• Consistent definition: net vs gross, domestic vs foreign, debt vs liabilities vs credit

Overall, it is worth looking at both government and private sector debt, but to come up with a figure for total debt is hard in a meaningful sense.

Sectoral balances

Another factor worth bearing in mind is link between government deficit and finance/overseas net surplus. If government borrows more, it borrows from private sector or overseas. So the private sector is lending to government, building up assets. Or foreigners are buying UK assets.

Archived from 2013

Total UK debt

Total UK debt increased sharply in period 1994-2007.

Since 2008, there has been a fall in household debt as a % of GDP – as households cut back debt levels. (note GDP also fell in this period)

Financial sector debt has stayed constant at 200% of GDP.

Main Features

• Total UK debt is 500% of GDP in mid 2012
• The largest component of debt is from the financial sector.
• The deleveraging is greater than may appear from the statistics. Although debt levels have remained flat, this is against the backdrop of falling real incomes.

Compare experience of US – where total debt fell in period 2009-12.

Overall Indebtedness in Developed Economies

Source: Debt and Deleveraging pdf at McKinsey

The UK has seen the biggest rise in total UK debt in past 20 years. Only Japan is slightly higher.

Private Sector Debt

Some Notes

• There are big differences between different types of debt, e.g. mortgage debt has low risk of default and is secured against value of asset. In boom years, some of banks debt was highly risky and highly leveraged with little or no security. When credit crisis came, they were short of money and couldn’t get loans bank.
• The high level of debt by UK financial institutions is also a reflection of the size of the finance sector relative to the size of the UK  economy.
• Since 2008, UK consumers have reduced debt levels. However, the fall in GDP has meant the decline in debt as a % of GDP has been limited.
• Low interest rates have made debt repayments relatively manageable. But, if interest rates were to rise, it would be more serious.
• Bond yields are low on UK government debt
• The recession led to a big fall in consumer spending as banks and consumers tried to pay off debt, this decline in private sector spending caused an increase in government borrowing. This increase in government borrowing helped to prevent a bigger fall in aggregate demand and more serious recession.

Long Term Impact of High Debt Levels

To improve debt position, consumers try to increase overall savings.

What does this debt mean?

• In the current climate, the high debt overhang, will curtail investment and spending. As firms, banks and consumers try to improve their debt position, it will lead to lower demand in the economy. This is exacerbated by government spending cuts as it tries to improve its own fiscal position.
• International comparisons are not everything. UK and Japan have the highest total debt levels, but they are not facing higher bond yields like in Italy and Spain.
• The size of the financial sector inflates the UK total debt, and it should be remembered it is important to compare to assets. But, high debt levels are significant.
• The high level of debt is one reason why it has been so difficult to get out of recession. It bears all the hallmarks of a balance sheet recession.
• The policy of quantitative easing has helped to a limited extent offset the fall in private sector spending. However, it monetary policy has been fairly limited.
• To a small extent, Inflation in the UK has also been ‘inflating away our debts‘

About The Author

Tejvan Pettinger

Tejvan Pettinger. Author of “Cracking Economics” “What Would Keynes Do?” – studied PPE Oxford University (1995-99) and works as an economics teacher and writer.

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