Can the UK ever pay off its debts?

When people talk of UK debt, they usually are referring to government debt. This is debt the government has borrowed to finance budget deficits (when government spending is greater than taxation revenue) There is also external debt, which is the net amount the UK (private and public sector) owe abroad. This external debt is high (2011, £6,114bn over 400% of GDP) Though external debt is balanced by external assets.

Most of UK government debt is held by the domestic private sector investors (approx 70%). So when we talk about UK debt – it is slightly misleading. It is more like a family, where one family member gives money to another family member. It is merely moving money around the family rather than borrowing from abroad. The UK government is borrowing money from the domestic private sector.  Paying off UK debt involves transferring money from general taxpayers to bondholders. It doesn’t actually change the amount of money in the economy.

What does paying off debt involve?

Government debt is financed by selling bonds. These can be short maturity (3 months to 30 years and in the case of First World War – unlimited). To pay off debt, the government could run a budget surplus with tax revenues greater than spending. With this surplus, the government would then purchase existing bonds back. Nevertheless, to repurchase the current level of debt (May 2019, UK public sector net debt was £1,806.1 billion), it would take many years to complete.

Taxes to pay off debt

The UK could pay off its debt if it increased taxes and bought back government bonds. However, there may be some difficulties in raising the necessary money in a short period.

Problems with raising tax to pay off debt

  • Also, higher taxes may create some disincentives to work or it may encourage the wealthy to move assets to other countries (tax havens) to avoid tax revenue.
  • Another issue of paying off the debt is possible implications for aggregate demand and economic growth. A sharp rise in tax could lead to lower spending. Bondholders would gain more cash because their bonds are bought with tax revenue.
  • But wealthy bondholders are unlikely to spend much of this extra cash – because they are interested in saving. Therefore, the net effect of trying to quickly reduce national debt would be to cause a fall in aggregate demand and lower economic growth and even recession. If the economy is growing quickly – with some inflationary pressure, then raising taxes would reduce inflationary pressure and growth would remain positive. But, if the economy was growing weakly then higher taxes could push the economy into recession.

Do bondholders want to be redeemed?

Another issue of UK debt is that there is a strong demand for buying government bonds. They are seen as a good investment and a secure way to save money. Despite low-interest rates, there has been a strong demand for buying government bonds – from the private sector, e.g. banks, pension funds, investment trusts. If the government paid off its debt and refunded all bondholders, it would be a little frustrating for these banks, pension funds, and investment trusts because they would have to find somewhere else to invest the money they would receive. To maintain a similar balanced portfolio, they would probably end up buying foreign government bonds, e.g. Eurobonds and US government bonds.

History of government debt


The history of national debt shows that we have been unable to pay off our debts since records began. There are few countries in the world with zero government borrowing. Perhaps a few super-rich oil countries have zero or minimal borrowing. UK borrowing fell sharply in the post-war period (due to strong economic growth) – there was no particular goal to pay off all debt.

The government still has some un-dated war bonds from the First World War. Bonds with no maturity date.

Can we afford to meet our debt interest repayments? Is debt sustainable?

A better question is how affordable is UK debt?

source: IFS

This shows the percentage of GDP which goes on debt interest payments. Since the 1970s, debt interest payments as % of GDP has fallen – even though debt has increased.

What could we sell to pay off our debts?

We sold our best assets in the 1980s during the government’s policy of privatisation. Many big firms like BT, BP, Electric companies, Water and Gas were sold (often at less than market price) to shareholders. These days the UK doesn’t have many assets left to sell.


2 thoughts on “Can the UK ever pay off its debts?”

  1. Hi, great posting here. However, I am still a little bit confuse. When we say government debt as a percentage of GDP, does that figure imply internal debt as a percentage of GDP or internal plus external debt as a percentage of GDP? Please help to clarify. Cheers

    • It implies the government’s debt – which is 70% held by internal investors and 30% of foreign investors.

      This government debt held by foreigners is only a small portion of the other measure of external debt. External debt includes all private sector and public sector liabilities.


Leave a comment

Item added to cart.
0 items - £0.00