At the end
of May 2020, UK’s national or government debt was just under £2.0 trillion which
is nearly 100% of its gross domestic
product (GDP). National debt is the total the government owes to the private
sector. The national debt arises when the government spending each year is more
than its income through taxes, and it accumulates every month. In the month of
June 2020, the government’s borrowing figure was just below £30billion.
National debt is financed by selling
government gilts, Treasury bills and bonds to the private sector in return for
an interest on the bond. Debt can also be financed by the Bank of England
printing money and buying bonds itself. One positive thing in the current
borrowing situation is that interest rates is so low that the government is actually
spending less on servicing its debts than what was originally planned during
this period.
National
debt is not necessarily a bad thing, if it is in balance and enables expansion
of the economy. For example, the economy needs a small inflation of 2-3% which will need the additional debt every
year. Similarly government needs finance for its commitments such as pension
payments to the retired, financing infrastructure and other expenditure which
is required to drive growth.
However, the impact of the pandemic slowdown and
emergency policy measures have caused the debt to reach these levels and are
likely to see an unprecedented rise over the rest of 2020 and 2021. GDP is
expected to fall at least 30% because of a nationwide shutdown which will
result in fall in tax
revenues - income tax, VAT,
corporation tax and excise
duties. Besides the government will
have to spend more on benefits – for the unemployed, housing benefit, sickness benefit (Universal Credit). The borrowing is expected
to fall after a few months when different schemes are wound down.
There are countries which have similar
or higher debt, for example, Japan has a National debt of 225%, Italy is over
120% of their GDPs. Also, the UK has had
much higher national debt in the past, e.g. in the late 1940s, UK debt was over
200% of GDP. However, the sheer size of the current debt means that the
Treasury will try and ensure that things don’t get worse. The common fear is
that there will be austerity measures put in place and there will be less
economic support for ordinary people in the future. Such measures taken from
2010 onwards did quite a lot of damage to the society – from increase in
homelessness, stalling life expectancy and a general rise in poverty of working
families.
It’s probably time to see alternative mechanisms
to reduce the debt coming from the income side - introducing progressive tax
rises and growth through investment. Corporation tax in the UK has been reduced
to 19% and is the lowest rate in the G20. There is also room to revise property
and land taxes upwards. On the income tax front, increasing the top rate of
income tax from 45% would bring in the rich to share the load of the reducing
the borrowing. The reliefs currently allowed in capital gains tax can also be
revisited. Investments in infrastructure and housing also remains a priority
and if this can be done by channelising towards new green projects, it would
help in creating jobs, supporting businesses as well as driving the
sustainability agenda. While the recent pandemic is unprecedented in its
impact, the government has the opportunity to do a reset and re-prioritise
initiatives to bring the debt to the desired levels.