How worrisome is the UK’s national debt?

 

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.