UK public debt: a concern?

One of the issues economic commentators and politicians most frequently cite as an indication of the UK’s challenging economic situation is the size of the Nation’s public debt. The concerns tend to focus on the cost of financing it, the limitations it places on the government’s ability to increase spending (not always a bad thing), and the constraint it places on the economy's ability to grow.

For those readers who might find this subject a bit dry, I apologise. But, as usual, the debate about the Nation’s indebtedness tends to be a bit one-eyed, like many other issues confronting the UK economy.

First to the quantum of public debt and how it became so large. As the charts show below, the budget deficit (as defined by the “current budget deficit”, which is all receipts and all current spending but excludes government spending on net investment) went from a parsimonious 2% of GDP to 15% of GDP as a result of the extraordinary government spending related to the pandemic. (The government furlough scheme, for example, paid the wages of over 10 million workers who were instructed not to go to work during the extended lockdowns). This was, of course, then quickly followed by the cost-of-living crisis, which followed Russia’s invasion of Ukraine and led to the government’s intervention in the form of the energy price guarantee scheme. These two dramatic events resulted in approximately £300bn of additional government spending.

It is interesting and somewhat ironic that the most vociferous critics of the current level of the national debt are typically the very same people who advocated for longer lockdowns during the pandemic and more government support for hard-pressed families coping with increases in the cost of energy in 2022 and 2023.

Nevertheless, we are where we are, but it is helpful to understand how we got here.

Going forward, and based on current projections, the budget deficit is expected to decline rapidly to 2% in fiscal 26/27 and then to 1% in 28/29, and debt to GDP to stabilise at just above 90% (see the second chart below). It is also worth noting that these forecasts are based on the OBR’s projections, which, as those of you who have read my last blog will know, are likely to be way too conservative.

To finish the numbers before I tackle the "so what" question, I wanted to show some data illustrating the cost of this debt from a short—and longer-term perspective.

First, to the short term. Because the UK government has issued so much index-linked debt in recent decades (to meet the demand from defined benefit pension funds), the interest bill on the Nation’s debt is highly positively correlated with inflation, as you can see from the chart below. With inflation now returned to target, this interest bill will continue to decline in absolute terms and relative to the size of the economy.

In a longer-term context, the interest bill on the current level of government debt whilst still high in the context of recent history, is well below the average of the last 80 years of UK economic history.

So, is this level of public debt in the UK a concern from a funding perspective, is it constraining the government’s ability to deliver high-quality public services (more spending) and does it constrain the UK economy’s ability to grow? (the crowding out concept)

I will have a go at answering these now that I have given you the data.

1. Is the cost of the UK’s debt manageable?

From a longer-term historical perspective, the answer is yes. The UK has, for much of the last 80 years, coped well with a much higher debt interest burden. That is not to say that the government should be complacent about the cost of the national debt, but all the signs are that this reducing cost is sustainable and that markets are happy to buy the UK’s debt at rates that are internationally competitive, not least, for example, at a lower cost than the US borrows at.

2. Is the current level of debt a constraint on the ability of the government to deliver high/higher quality public services?

Every government and every opposition party would probably rightly say yes to this question. Ultimately, there are always constraints on what any government would like to spend on public services, and this is probably a good thing in the long run. Economic theory suggests that if something is scarce or limited in supply, the perception of its value increases significantly.

Inevitably, the answer to this question bumps into politics, and this isn’t something I want to get mired in. All I would say is that we all lose sight from time to time of the breadth and quality of what the state provides for us in modern Britain.

To put some numbers on this, the government spent about £17,000 per head in 2024 and, prior to the pandemic, was spending about £11,000. Once inflation is taken into account, that’s an increase of about £3,000 per head. Health costs are also about £3,100 per head; maybe, if the UK had a healthier population, this might be enough. However, in modern Britain, we have, in a way, chosen an odd path, which is to live less healthy lives and then wonder why the free at-the-point-of-need health system appears to be underfunded. My guess is that the challenges confronting the UK health system are as much a problem of demand as they are of supply.

3. Does the current level of public debt constrain the UK's ability to deliver economic growth?

There is a point when the level of public debt becomes a constraint on growth, and there have been many international examples throughout history of this. However, in the case of the UK economy, there is no evidence whatsoever that current levels of debt are constraining the economy’s growth rate. Indeed, over the last 65 years, there has been no observed correlation between UK GDP growth and the level of public sector debt.

Summary

My summary is that the frequently cited angst about the level of public debt in the UK is somewhat exaggerated. The debt burden is relatively high in terms of the UK’s recent history but not in a longer-term context nor relative to our G7 peers. The cost of the UK’s debt burden is reducing significantly, but, importantly, it appears not to be a concern to the buyers of the debt. Neither is the debt burden a constraint on the UK’s ability to deliver growth. It may appear to be a constraint for the newly elected government keen to deliver on its pre-election promises, but as I showed in an earlier blog, the economy will deliver the fiscal upside the Labour government needs to do this without the need to borrow more or increase the burden of tax.

P.S.

The level of public debt is important, clearly, but with respect to the UK economy as a whole, it is only part of the picture. To get a completely rounded perspective of UK indebtedness, we should also look at debt in the private sector, and this is the subject of my next blog.

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