The Doom and Gloom of UK Public Debt

What is government debt? 

Government debt refers to the total financial liabilities of the public sector. When a government budget is not large enough to pay for all public sector spending, it is likely that the government will either cut spending, or borrow more to pay for the public sector. In the fiscal year 2023/2024 government revenue (from taxes and other receipts) was £1,098 bn or £1.7 trillion - whilst government spending reached £1,230 billion or £1.2 trillion, meaning that the UK had a budgetary deficit of £131 billion, which is equivalent to 4.8% of GDP.

Rather unexpectedly, government borrowing actually increased in December of 2024 to £17.8bn - the highest December level for 4 years, with December repayments hitting £8.3bn - the third highest since records began in 1997. During the year 2024, the UK still faced above average inflation of around 4-5% in the last two quarters of the year, with the Consumer Price Index (CPI) rising by 2.5%.

Although rather encouragingly, inflation has seemingly fallen to around 2.5%, in line with the Bank of England target of 2% - likely putting the bank on course for further interest rate cuts

The Importance of Gilts

Gilts are a common form of loan that the government borrows from investors and promises to repay them (with interest). They are often relatively popular due to their perceived stability compared to other areas of investment. Gilts can also be bought back from the government, but in effect you are lending money to the government, meaning they can be traded - but their value is open to change.

However, the costs of many bonds have risen in recent years, meaning the government has to pay ever greater and greater sums of money to lenders.

The Outlook

If the government were to continue down a path of high borrowing, it would be very likely that the UK would get stuck in a debt loop - meaning that as the government takes on more debt, they can’t pay for other services, so need to borrow to pay for it; only feeding the amount of debt they have to service and the cycle continues.

Speaking from the World Economic Forum in Davos, Switzerland, Chancellor Rachel Reeves restated her pledge of going “further and faster” to deliver growth. The government hopes that higher growth will increase tax revenue, giving the government more money to spend on services and infrastructure - and thus reduce the need for borrowing.

Those who support government borrowing suggest that in fact it is a good way of making money available to step up government investments - something critically needed with the current state of the economy. The main idea is that with the money spent on investment, the government will receive returns on that investment that help pay for the original debt taken out to pay for it; usually in the form of increased tax revenue from the economic benefits created. 

Economist Alex Kerr of Capital Economics, a London based consultancy firm, stated that the difficult “backdrop of slowing GDP growth” and high interest rates, that the rate of borrowing in December is “disappointing news for the Chancellor”.

Although, critics of government borrowing believe that when a government borrows heavily, the funds that they are receiving become competitive with private sector firms, known by others by the term ‘crowding out’ - leading to increases in interest rates. Understandably, this puts the Bank of England in a rather precarious position

Amidst the worrying data, the OBR has stated its optimistic prediction for UK debt levels to fall and that by 2029/2030 the UK should be in a £9.9bn surplus, a good sign of what could arise in the coming years.

As the government attempts to carry out its ambitious growth agenda, the problem of debt and borrowing will not dissipate. If the government truly hopes to end the Parliament with a healthy and growing economy and balanced payments the hard work must start now. With only two real options; increase taxing, or reduce spending, the Chancellor is not short of problems - if she were to do either, she would break her election promises, so the only hope she has left is that her plan starts working - and soon.