UK Debt burden

UK debt, a perfect storm

Slow-Growing UK Faces Over £2.6 Trillion Debt Pile

£2,600,000,000,000 in debt

The amount the UK owes exceeds GDP for first time since 1961. Inflation-linked bonds mean the UK is paying more than its peers.

From the financial crisis to Russia’s invasion of Ukraine, the UK has borrowed and spent its way out of every jam. The bill for that is becoming a massive concern for the UK treasury and for the economy.

£2.6 trillion public debt

The UK’s public debt has soared by more than 40% to almost £2.6 trillion ($3.3 trillion) since the pandemic struck, leaving the country owing more than its entire annual economic output for the first time since 1961. A heavy reliance on index-linked bonds, at a time of high inflation, also means Britain will pay more to service the debt.

The high level of debt poses a risk to the UK’s credit rating, which could affect its borrowing costs and fiscal credibility. The three main credit-rating firms are due to update their assessments of the UK over the next four months in 2023, and some analysts are concerned that the UK could face a downgrade, especially after the U.S. lost its AAA status from Fitch. 

ONS data to March 2023

A downgrade could undermine Prime Minister Rishi Sunak’s effort to rebuild Britain’s fiscal reputation after his predecessor, Liz Truss, triggered a bond-market crash in 2022 by promising huge unfunded tax cuts.

Bond sell-off pressure

The pressure on the UK’s finances is also being compounded by a selloff in bonds amid aggressive rate hikes by the Bank of England to quell inflation. The yield on the 10-year benchmark this week rose above 4.70% to its highest since 2008. 

UK debt higher than UK GDP March 2023

The UK bond market is among the developed world’s worst performers this year. The rise in yields could increase the cost of servicing the debt, which is already high due to the UK’s heavy reliance on index-linked bonds that adjust with inflation.

The UK’s economic growth is forecast to remain flat through next year, which limits the scope for reducing the debt through higher revenues or lower spending. The National Health Service is stretched to breaking point and the tax burden is already at a 70-year high. The ONS warned that debt could balloon to more than three times GDP over the next half century without action.

ONS data

According to the latest data from the Office for National Statistics (ONS), the UK’s gross domestic product (GDP) grew by 0.2% in the second quarter of 2023 (April to June), following a revised growth of 0.1% in the first quarter of 2023 (January to March). This means that the UK’s GDP growth rate for the whole year of 2023 is estimated to be 0.3%, which is lower than the previous forecast of 0.5%.

ONS data to March 2023

The main factors that contributed to the weak GDP growth in the second quarter were the slowdown in consumer spending, the decline in business investment, and the negative impact of the additional bank holiday in May due to the King’s Coronation. The services sector, which accounts for about 80% of the UK’s economy, grew by only 0.1% in the second quarter, while the production sector grew by 0.7%, and the construction sector fell by 0.2%.

Uncertain outlook in uncertain times

The outlook for the UK’s economy remains uncertain, as it faces several challenges such as high inflation, rising interest rates, a slowing global economy, and the ongoing effects of Brexit and the effects of the war in Ukraine. 

ONS data for EU countries

Some economists have warned that the UK faces a ‘very real risk’ of recession due to higher interest rates, which could dampen consumer and business confidence and increase the cost of servicing the debt. 

The OECD has projected that the UK’s GDP growth will improve moderately to 1.0% in 2024, but still remain below its pre-pandemic level.

Leave a Reply

Your email address will not be published. Required fields are marked *