Britain's national debt appears to be spiralling out of control
Current Affairs

Are we headed for £2 trillion in national debt?

“We’ll be back in the black by 2020!” was George Osborne’s persistent war cry during his time as Chancellor of the Exchequer. Since the Brexit vote, that ambition has now changed though, and Osborne’s successor Philip Hammond confirmed at the recent Autumn Statement that the new plan is to restore the public finances to balance ‘as early in the next Parliament as possible’.

But what does it all mean? And why do Conservative politicians talk of a falling deficit, while those across the benches claim debt is rising? Who’s right, and who’s wrong?

First and foremost, the important thing to understand is that budget deficits (or surpluses), net borrowing and the national debt are all different things. Once these are better understood, you’ll be better placed to assess the status quo of the country’s finances.

Budget deficit (and, hopefully soon, a surplus)

The current budget deficit (or surplus) is simply the difference between Government receipts (largely from tax) and its everyday expenses such as welfare payments or departmental running costs. This equation generally does not factor in investments (eg: road or rail expansions). In layman’s terms, it is thus the difference between what is spent and what is received – bar the cost of funding investments.

It may sound far-fetched in today’s world, but the UK actually ran a budget surplus for four consecutive years until 2001, and there was a surplus each year between 1947 and 1974. However, this has all changed significantly in the 21st century, with the budget deficit peaking at £103 billion in 2010 (around 7 per cent of GDP). This figure has since declined steadily, dipping under £60 billion for the 2015/16 fiscal year, and is forecast to be below £50 billion in 2016/17.

Borrowing

Although budget deficits and borrowing are linked, the above doesn’t factor in the money Government borrows for investment. So if Government runs a deficit, they will also need to borrow to cover the costs of any investment.

Like the budget deficit, net borrowing has also been on the decline since 2010, when it hit the dizzy heights of £150 billion. A revised forecast in the wake of the EU referendum by the Office for Budget Responsibility – the Government’s fiscal referee – predicted that net borrowing would come in at £68.2 billion for 2016/17. However, there was some good news this week, as figures for Q4 2016 suggested that, if borrowing continues on its current trajectory, this figure will likely be closer to £61 billion.

So, we’re getting things under control then, right? Not exactly…

National debt

This, unfortunately, is where it starts to get a bit hairy. The national debt simply refers to the amount of money owed by Government, and is a cumulative total as a result of the spending of successive parliaments over many years. Note that this typically refers to net debt ie: total debt minus the Government’s liquid assets.

And the news on this front is not good. Between the financial crisis of 2008 and 2013, national debt doubled to more than £1 trillion. The resulting recession was thought to be justification enough for such an escalation. But figures released this week showed that the UK’s debt pile currently sits at a staggering £1.7 trillion. In fact, in 2016 alone it rose by more than £250 million every single day, and it is forecast that debt will rise to 87.3 per cent of GDP for 2016/17 (from 84.2 per cent the year before). Given that clearing the deficit has been pushed back into the next decade, it seems safe to assume that the £2 trillion barrier may well be breached in the not-too-distant future.

But remember, even if the budget is in surplus, it doesn’t even necessarily mean that our national debt will begin reducing, given that the cost of borrowing to fund investment could outstrip that of the budget surplus itself!

Looking ahead

It isn’t all grim news at least. The economy’s performance after the referendum, which has generally exceeded the expectations of experts on most fronts, has reflected in the public finances too. In the nine-month period to December 2016, central Government tax receipts, National Insurance contributions, corporation tax takings, VAT receipts and income tax receipts all increased markedly compared with the same period the year before.

It’s thus resulted in a far rosier picture than was anticipated by original forecasts, and if the UK economy can continue its current direction of travel, the national debt may well start reducing sooner rather than later.

However, the overall figures are undoubtedly a reality check, and a frightening reminder of the debt this country currently faces; one made all the more expensive to service by virtue of ratings downgrades from the likes of Moody’s and S&P in the wake of the Brexit vote.

The economy has shown remarkable resilience over the past six months, and indications are that it will continue to do so in 2017. But for Chancellor Hammond, whose March Budget speech is now very much on the horizon, it is the current state of our public finances which will concern him most. And if he is to restore fiscal health and sustainability, it is imperative that dealing with our debt retains its place in and around the top of his agenda for many years to come.

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Michael Todt

Mike joined Lending Works in early 2015 with a background in marketing and journalism. Having long held a passion for economics, he is now the chief contributor to the Lending Works blog, and regularly writes about all things peer-to-peer lending, fintech and personal finance.