It’s a big, round and alarming number. Yes, the UK national debt has just surged through the £3tn mark for the first time, a milestone made all the more remarkable by the fact that around a third of this growth has been in the past six years, and a staggering two thirds since the financial crisis a decade and a half ago, before which it was less than £1tn.
Shocking. What may surprise you to learn, however, is that beneath the headline numbers, the narrative around British indebtedness is at last beginning to shift on to a more positive note.
Don’t get me wrong. I’m not trying to belittle the challenges. The damage done to the public finances by three economic shocks in a row – first the financial crisis, then the pandemic, followed in short order by the energy price shock caused by Putin’s invasion of Ukraine – is off the scale.
Equally striking is the almost complete failure of successive governments to engage in meaningful repair of the public balance sheet after each of these crises.
There was admittedly some limited progress during George Osborne’s tenure as chancellor, a programme of fiscal consolidation condemned as “austerity” by his political opponents. Yet in truth, it was never as deep as they made out. In any case, by the time Brexit and the pandemic came along, the Government had largely given up on debt reduction.
For one thing, the incentives had disappeared. Debt was essentially free, and the politicians couldn’t resist dipping their hands into it. Little regard was paid to the inevitability that one day it would again carry a price.
Like a constantly receding horizon, the point at which the national debt is expected to start showing material reductions relative to GDP has been repeatedly pushed out into the indefinite future.
This makes the current period of elevated public indebtedness quite different from previous such episodes, which have nearly always coincided with major wars. On all these occasions, debt would naturally start falling from the moment of demobilisation and the reduction in military spending that followed.
Post-Second World War, moreover, there was the demographic dividend of an unprecedented baby boom to support growth and productivity improvement. Neither of these factors exists today; military spending is rising, not falling, and so too are demographically led spending pressures as baby boomers move into retirement and begin to put maximum load on healthcare budgets.
As for the peace dividend which flowed from the fall of the Berlin Wall, the proceeds were largely squandered on higher social spending for no observable reward in terms of enhanced growth. It beggars belief that more than five years after lockdown restrictions were lifted, public spending remains some four to five percentage points of GDP higher than it was before the pandemic began.
There has been little if any attempt to get on top of the burgeoning welfare bill, where an astonishing 700 additional claimants are signed onto disability benefits every day. The Government feigns fiscal discipline, but proposes to tackle the problem by spending even more, this time on measures to help the economically inactive back into work.
So why do I say the outlook for debt seems to be improving? Looking at the detail of the latest Office for National Statistics update on the public finances, you might conclude the reverse. Debt accumulation in the year to date is notably overshooting what the Office for Budget Responsibility forecast at the time of the last Budget.
That’s not because tax receipts are lower than forecast; to the contrary, they are higher thanks to better growth. Spending, on the other hand, is also quite a bit higher than budgeted for. The Government cannot seem to get a grip. Not that you would know this from the pat on the back it gives itself for apparently exceeding its efficiency targets.
In an assessment published this week, the Government claims to have delivered £16bn of efficiency and cost savings last financial year, equal to 4.1pc of all departmental spending. Believe it if you will.
Nonetheless, all things are relative, and the eye of Sauron has moved across the Channel to France, whose fiscal and political predicament seems notably worse than that of Burnham’s Britain. The US would also seem to be in a bigger – and for political reasons intractable – fiscal mess than the UK.
Some readers may not want to read this, so look away now. Never mind its £3tn debt mountain, the UK has moved off the naughty step in bond markets and is increasingly seen in a relatively positive light.
Three trillion makes a good headline, but doesn’t in itself mean a great deal. What does count is where borrowing is heading as a proportion of national income.
In the past year, the UK has moved out of the 5pc club still occupied by the US and France and is now forecast by the International Monetary Fund to have the lowest deficit by 2029 in the G7, with overall debt as a share of national income on a falling trajectory.
Achieving this goal is of course still wholly dependent on maintaining the fiscal drag of frozen personal tax thresholds. But assuming the Government stays the course, then this is where the public finances ought to end up. This pleasing trajectory is also plainly dependent on the absence of further external shocks, which you wouldn’t bet on given the current state of the world.
All the same, the British predicament isn’t quite as bad as breaking the £3tn debt barrier might suggest. Burnham has turned out not to be the Left-wing firebrand once feared, but essentially continuity Starmer with better political antennae. By pre-announcing an end to the triple lock, he has moreover shown himself willing to expend considerable political capital by doing unpopular things, and so far he has avoided repercussions.
In labelling the UK as essentially bankrupt, commentators focus almost exclusively on public indebtedness, but elsewhere in the economy the story since the financial crisis has been one of significant improvement.
The household debt-to-income ratio stood at 116.5pc in the second quarter of this year, against 157pc going into the financial crisis. It’s a similar picture with non-financial corporate debt, which, as a share of national income, has fallen from 90pc to 64pc. While the public balance sheet has been going to hell in a handcart, the rest of the economy has been sharply deleveraging.
I don’t want to overstate this picture of improvement. The challenges facing the UK economy remain formidable, and are not helped by a Government that seems to believe the solution to every problem is to tax it more. Yet the narrative around debt has most definitely changed. Let’s hope John Healey, the Chancellor, doesn’t mess it all up again in next week’s Budget.
