UK Government Debt Crosses an Eye-Catching £2,500,000,000,000
At the end of 2022, the total debt of the UK Government crossed an eye-catching round-number threshold. The Government accumulated borrowings exceeded £2.5 trillion (£2.5 million million) for the first time. Another way to look at the debt figure is that it was just 0.5% smaller than the UK’s Gross Domestic Product (GDP) – the nation’s entire annual economic output.
It has since slipped below the £2.5 trillion mark it crossed in December’s initial figures, ending January at £2,492.1 billion, equivalent to 98.9% of GDP. And, the December figure has been revised down so that it is now under the £2.5 trillion threshold and the same 98.9% of GDP. Nevertheless, a year ago, debt was 97.7% of GDP and £143.4 billion less in cash terms.
Does it really matter?
In the best of economic traditions, the answer is both yes and no:
Yes because a large pile of debt means a correspondingly large interest bill. The Office for Budget Responsibility (OBR) estimates the 2022/23 interest bill will be about £120 billion, which is just under half the revenue produced by the largest single tax, income tax. Viewed another way, debt interest also equals nearly half of total welfare spending. If there were less debt, there would be less interest to pay and more for the Government to spend elsewhere.
No because the UK has seen higher levels of debt relative to the size of its economy in the past and survived. In the 30 years from the early 1960s debt was reduced from around 100% of GDP to 22%. A combination of inflation, higher taxes, financial repression (maintaining interest rates below inflation) and economic growth all helped to lower the debt/GDP ratio. The UK has three out of four working in its favour at present.
Source: National Statistics
How does it affect me?
The higher interest bill and the need to bring down debt severely restricts the scope for cutting taxes, as Liz Truss and Kwasi Kwarteng so clearly demonstrated last autumn. Large debt can also keep interest rates (and hence mortgage rates) higher than they otherwise would have been – the more a country needs to borrow, the more its lenders will charge.
Given that debt reduction will take decades, the Government is going to be a big borrower for many years – not only in terms of new debt (£140 billion new borrowing is forecast for 2023/24), but also in refinancing the old debt as it matures. One side effect noticeable in the past few months has been that National Savings & Investments offerings have become more competitive. For example, for the first time in a long while, £25 wins do not represent more than half of all premium bond prizes.