On the UK’s Recent Debt Milestone

Pop quiz: When is scoring 100% not something to be proud of? Apparently, when that figure refers to government debt’s share of gross domestic product (GDP, a government-produced measure of economic output). Turns out UK debt did this last month, and financial publications we follow didn’t give it high marks. Instead, we read headlines that bemoaned hitting a dubious milestone for the first time since 1961.^[i] With many economists we monitor anticipating more government borrowing to fund higher spending, we have seen speculation that managing this debt will require vast austerity and weigh on the economy for years. But higher debt alone doesn’t imperil a country’s economic prospects, according to our research, and its hitting 100% of GDP isn’t some magic number.

The UK’s debt-to-GDP ratio was the headliner, but we read some commentators argue underlying trends signal brewing trouble. For example, the Treasury has borrowed £64.1 billion so far this year—£6.2 billion more than the Office for Budget Responsibility’s (OBR’s) year-to-date projection from March—to fund benefits increases and higher operating costs and pay.^[ii] Public spending isn’t likely to slow soon, as the government accepted public sector pay boards’ recommendations for higher pay increases.^[iii] Moreover, any potential tax hikes or spending cuts in Chancellor Rachel Reeves’ upcoming October Budget will likely come too late to slow spending and rein in deficits (the difference between government revenues and spending) now—which would require the government to issue more debt.

In our experience, rising government spending and borrowing can stoke strong emotions in voters and investors, but for the latter, we think it is critical to put aside personal viewpoints and question the validity of debt’s supposed onerous economic effects. Consider: The UK’s debt-to-GDP ratio has blown past triple digits in the past. After the Napoleonic Wars ended in 1815, it was close to 180%.^[iv] However, debt-to-GDP trended lower for the rest of the century as industrialisation powered Britain to economic superpower status.[v] In the 20^th century, this measure hit an all-time high of 252% in 1946—due largely to the surge in military spending during two world wars.^[vi] But that didn’t prevent postwar UK economic growth, which is what reduced the burden—not deep austerity to reduce debt in absolute terms.^[vii]

We think part of the reason these lofty ratios didn’t lead to doom is that measuring debt against GDP is apples to oranges—not a comparison of like with like. Debt accumulates over time (think years, even decades) whilst GDP is the annual flow of economic activity. Furthermore, debt-to-GDP says nothing of debt service’s affordability, since governments pay creditors with tax revenues, not GDP. As of August 2024, central government interest payments comprised 6.8% of revenues, below the long-term median of 8.6%—little here looks troubling today for the UK economy, in our view.^[viii]

Now, we noticed some commentators concede debt interest is manageable now but warn higher interest rates mean a more expensive future bill. For instance, the OBR anticipates debt servicing costs will rise £100 billion a year from fiscal year 2024/2025 to 2028/2029.^[ix] However, the government’s tax-and-spending watchdog acknowledged debt interest spending “has also proved to be incredibly volatile and subject to large revisions between our forecasts.”^[x]

As we showed last month, the UK’s fiscal standing improved considerably over the past 12 months: Even though government spending was up, interest payments fell. Much of Britain’s debt is inflation-linked. That inflation (broadly rising prices across the economy), previously projected to spike interest costs, has reversed faster than forecast. This, plus an unwelcome stealth tax hike in the form of frozen Higher and Additional Rate tax thresholds, has both increased revenue and lowered interest costs.^[xi]

We aren’t saying a nation can or should add debt continually with no thought to the future. But viewing government borrowing in a vacuum and presuming trouble based on it hitting arbitrary milestone figures is off base, too, in our view. The UK has a long history of carrying a lot of debt—and an equally long history of growing out of it. Perhaps that changes in the distant future, but for now, we think national debt warnings remain overstated—a false concern common in the developed world.