Where Do We Go With The (UK) National Debt?

What are we doing about the national debt? At a practical level, making it bigger.

see, for example: https://commodity.com/debt-clock?off

Most of the public focus is on the deficit (how big a gap there is between income and expenditure in the current year) and how badly ‘austerity’ is making everything. In spite of this, the office of National Statistics states that the public sector net debt increased by £123.5 billion between tax years 2016 and 2017.

If you think that’s a lot of money, see below.

Nations conventionally are ‘allowed’ to run a deficit over a number of years, creating a national debt, during periods of economic downturn. The proviso is that during the good times, the debt is repaid, so over the long term, things balance out. On this basis, other countries feel able to lend to you when times are tight and in turn they may need to borrow from you if and when the tables are turned.

This is all very well until things become seriously imbalanced for a country; when a debt has been run up that has become so large, there is no real chance of paying it back. Ever.

So when do we think this is? Conventional economic ‘wisdom’ (I know, I’m stretching a point here) says that once a nation gets to around 100% of GDP or more, the risk of default is very high. In fact, I don’t think there is an example in history where a nation has managed to make the repayments.

National debt is effectively spending today what we need to pay back tomorrow. It is referred to as ‘mortgaging our futures’ or ‘spending our children’s inheritance’.

The table below shows the full UK position for national debt.

£3.5 trillion in public liabilities and counting

Source: HM Treasury, Whole of Government Accounts for the year ending March, 2015

Dan Denning, of South Bank Investment Daily, summed up the situation of what the real numbers are, thus:

“If you’re under the impression that the UK’s public sector net debt is currently £1,729.5 billion at the end of March this year, or about 86.6% of GDP (and therefore no big deal), I’m sorry to say you’re mistaken.”

He went on to say that, as shown in the table above, the Whole of Government Accounts (WGA) figure which includes all public liabilities is a much more burdensome picture! This full, broad measure of government finances includes all unfunded state pensions, unfunded public pensions, the decommissioning of nuclear power plants plus other items that fall outside the annual fiscal deficit.

Now if we compare UK GDP, which is £1.86 trillion with the total liabilities at £3.55 trillion, the debt to GDP ratio comes in at a rather massive 190%. Even if we use the net liabilities figure of £2.1 trillion, it is still 112% of GDP – and that’s assuming we can ‘sell’ all the countries assets on the government’s balance sheet to get it down to this level!

There are really only three ways to get rid of the debt:

1. Run a positive balance of payments and pay it back. To give some perspective, if we paid back at a rate of say, £50 billion per year, every year from now, it would take:

(3.5 x 10¹²)/(5.0 x 10¹⁰) = 70 years or until A.D. 2087.

To give further context, the UK last achieved any significant positive annual balance of payments surplus in the early 1980’s for a couple of years only and similarly at the turn of the millennium. This is the only time since World War II.

2. Have a high inflation economy so that the value of the debt is inflated away. This is a potentially useful approach for governments, so long as the inflation rate does not overly disrupt the rest of the national economy. This means playing a risky game balancing inflation rate against the impact on national and individual wealth.

3. The country can renege on its debt. This approach removes one problem but creates a few more!

The promises made on behalf of the public sector are considerable. They are a very strong drag on economic improvement in the future, with the implied increase in the proportion of GDP that is required to grow through value added from outside the nation (effectively export earnings that overcome the current difference in the balance of payments, plus plenty more to build a ‘surplus’). We can improve matters further by replacing imports with home grown/produced activity, keeping money and value within the UK.

Mind you; filling in the deficit at £123.5BN, then adding a further £50BN each year to pay off the debt is an awful lot of wealth to earn so that this level of tax can be paid. In FY2017, central taxation raised was £690BN. The challenge is to lift this by a further £175BN in round numbers, or about 25%.

Having looked at the government debt issue, the situation looks like it is going get much more difficult because the way we are as a nation is changing.

The older Britain gets, the bigger the pension liability

Source: Office for Budget Responsibility: Fiscal Sustainability Analytical Paper:
Population Projections and Spending Update

Britain was a much different country in 1961, wasn’t it? It was younger. Over 75% of the population was under the age of 54. Creating a welfare state and paying for it didn’t seem like a problem. You had lots of workers, rising wages, healthy spending, and healthy tax receipts.

Fast forward to today and we have lower birth rates, longer lives, fewer children and older people getting wealthier. Combining lower birth rates and longer life, the structure of the population begins to skew toward the 55 and overs (the baby boomers).

By 2065, nearly 37% of the population will be over 55 years old. Excluding those under 15 (so not paying tax), there will be under 46% of the population actually paying for the rest of us. This compares with just under 52% today. So, the growing unfunded public and public sector pensions, plus increased welfare state pressures represent a major problem.

I suggest that we are in the business of kidding ourselves: we believe that even now this is manageable. Immigration helps to grow the productive workforce. Huge public spending hides the issue. The WGA figures come out about a year after the reporting period ends and statements are in ‘accountant speak’ rather than plain English.

So, we have a problem but we can handle it and we don’t need to deal with it right now, do we?

What do you think?
Because it isn’t going away.