The Economy: 13. National Debt

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BBC Sounds, Music, Radio, Podcasts.

Welcome to Understand the Economy, the podcast that takes you back to basics.

We explore and explain those big economic stories and ask what they actually mean for our everyday lives.

And nothing feels bigger or economicier than the national debt.

Okay, I do know economicia isn't a word.

Politicians talk about government debt a lot.

In fact, when the Prime Minister Rashi Sunak promised to tackle Britain's five most pressing problems, he included making sure our debt was falling.

Now, in a previous episode, still available on BBC Sounds, we talked about bonds, guilts, stocks, and shares, and that the government borrows money and collects taxes.

When the income and the outgoings don't add up, just like with our own finances, the government borrows to make up the shortfall.

But it can be really hard to understand how much national debt is too much national debt.

So, in this episode, we will ask why we have debt as a country, how much we owe, who we owe it to, and key question, whether we should worry about it.

Here to tell us exactly how worried we should be is Dr.

Gemma Tetlow, Chief Economist at the Institute for Government, which is an independent organisation that aims to make government more effective through research and analysis.

Dr.

Gemma Tetlow, hello.

Hello.

Okay, let's start this off pretty simply.

What is national debt?

National debt is essentially the stock of all previous UK government borrowing that hasn't yet been repaid.

If I want to borrow money, I go to a bank.

It's a lot bigger than me.

It has a lot more money than me.

Where does a country the size of the UK go for a loan?

Historically, the UK actually did a pretty similar thing.

That's actually the origins of the Bank of England.

It was the person the government borrowed money from.

These days, the government issues bonds known as guilts, and the government now borrows money from a huge variety of people.

Most pension funds, for example, which probably lots of your listeners will have one of, will be invested in government guilts.

But also international investors will also loan money to the UK government.

We actually could spend a whole episode just talking about that, and the good news is we already have.

You can find it by searching at BBC Sounds for understand the economy.

Gemma, it's very tempting to talk about national debt using the language of personal debt, isn't it?

And politicians are always accusing each other of maxing out the country's credit card.

Are they comparable?

In the most basic sense, it is sort of like our debt in that you have borrowed money from someone and you promise to pay them some interest interest and then to pay back the capital.

But the really big difference, which is an important one, is that unlike you and I, the UK is essentially infinitely lived.

There's no date at which the UK is going to cease to exist and it has to make sure it's paid off all its debts at that point.

And similarly, the UK government has a pretty guaranteed income stream in the future.

You or I might lose our job tomorrow and so it matters how indebted we are, but the UK government can be pretty guaranteed that it will be be able to raise pretty large sums of money and tax in future to continue paying the interest on its loan.

So, it is quite different in that sense.

Okay, so countries aren't people, they don't stop working, they don't die, they can manage that debt on a much longer scale.

Yeah.

Okay, I have a banking app that tells me if I go overdrawn.

It takes a slightly bigger department to track the national picture.

Let's welcome back Darren Morgan, Director of Economic Statistics Analysis and Production at the Office for National Statistics.

We work with the UK Treasury and other government data providers to count the amount of debt that they have at the end of every month.

We've been measuring it in sort of a very similar way since just after the Second World War.

Debt at the end of November 2022 stood at two and a half trillion.

And when we compare that where we were pre-pandemic, it's gone up and increased by over a third.

The government had to borrow a lot more money during the pandemic because they had to finance the different support schemes for households and businesses, Whilst at the same time, because the economy closed at various points during the pandemic or wasn't fully operational, it meant that the tax tick was also a lot lower.

And for those two reasons, borrowing increased sharply and that added to debt.

Once we have counted the amount of debt, we also quote it as a proportion of the size of our economy, which gives an estimate of its affordability and context.

And debt at the end of November 2022 was 98.7% of the size of the UK economy.

And that's the highest level we have seen for 60 years.

Darren Morgan from the Office for National Statistics there.

So the national debt is rising and it's very high at the moment.

It's pretty much the same size as our entire economy.

Gemma, if that was my bank balance, I'd have nothing left to spend.

Is it a problem?

It's not an immediate problem.

It's quite hard to know at what point it becomes a problem.

If you think about the extreme, if government racked up very, very large amounts of debt, then you could end up in a position where the cost of servicing, paying the debt interest payments each year could be as much as all the tax revenues that the government collects.

And that's clearly a problem, because in that situation, the government can't afford to spend on anything else that we're used to governments doing, and it would have to spend all of its tax revenues just servicing past debts.

So that kind of extreme world is a problem.

Where we are now is clearly not a problem.

The government is managing to function reasonably well, and still investors are willing to loan it money at reasonable rates of interest.

It's hard to know where between here and that extreme world I just painted is the really problematic point that you should start worrying, but somewhere between those you should start worrying.

Because the Institute for Fiscal Studies has predicted that we could end up spending £100 billion just in interest payments in the next financial year.

That's more than the country spends on education.

It is a lot of money and it's a lot more than we have been spending in recent years.

There are two parts to it.

I think one is more worrying than the other.

One reason that debt interest costs are going up so much is that the effective interest rate the government is having to pay on its borrowing has gone up significantly.

Just as households have been hit by a big increase in inflation recently, that actually also has a big but temporary impact on government debt interest payment.

Have we always been borrowers as a country?

Government has borrowed for centuries, but not in the same way that it does these days.

So since the Second World War, the types of things that government spends money on have expanded significantly.

We now have quite a large welfare state.

We have big public spending on healthcare, lots of government spending on the infrastructure that supports those kind of services, whether it's school buildings, hospital buildings.

Historically, that was much less common.

So sort of government borrowing and government debt accumulation in previous centuries was much more related to one-off expenses and particularly around military spending.

Okay, well, hearing how long those debts last makes me feel a little bit better about my student loan.

But as you say, the government can still be paying off its loans centuries later.

Here's economic historian Dr.

Victoria Bateman with a little bit of history of a very early example of an expensive government bailout.

In the summer of 1720, while King George I was holidaying in Hanover, along with his courtiers, the British stock market witnessed an almighty crash.

And at the heart of this crash was the South Sea Company, a company which made money by trading in the South Seas of the Atlantic, including by supplying slaves to the Spanish colonies in South America.

As political relations between Spain and England worsened, so too did the fortunes of the company.

And by the end of the summer of 1720, the company's share price had spectacularly collapsed to the point that it left many an aristocratic family, along with other investors, teetering on the edge of bankruptcy.

Robert Walpole, then in charge of the nation's finances, hurriedly put together a rescue package.

with which the nation took on millions of pounds of South Sea Company debt.

Almost three centuries on, the British taxpayer was still paying interest on this debt.

Only in 2015 was the debt finally paid off.

So we've only just cleared that debt because our historic aristocrats were too big to fail.

But it shows, doesn't it, government debt can last for centuries.

What other kind of debts are we still paying off?

In 2015,

alongside repaying repaying those South Sea bubble debts, George Osborne also chose to repay some other long-standing UK Government debts.

And George Osborne is the former Chancellor.

Yes, exactly.

All of those debts had been on a perpetual term.

So essentially, the government had said it was never, ever going to repay the principal on those debts.

It was just going to keep paying interest every year.

And in 2014, at a time when the UK Government could borrow much more cheaply than the terms of those long-standing debts, George Osborne decided to redeem those old debts, pay them off in full, and issue some new, cheaper debt in place of them.

So we refinanced our very, very ancient debt.

We did refinance our debt, and that is what the government does on a sort of rolling basis.

So even though it may not be making net redemptions of debt each year, every year it is usually refinancing some more historic debts with more new debts.

So I want to ask a question that maybe doesn't get asked enough.

Can you tell us why we should care about our national debt?

I think there there are two broad reasons.

The first is simply that any interest payments on debt that we have to make each year is money that the government can't spend on other things that might be more beneficial to current taxpayers, whether it's health or education or welfare or pension payments.

The second reason is whether there is a relationship between the level of government debt and the growth rate of the economy.

And there was quite a lot of debate about this after the global financial crisis, with some quite influential evidence suggesting that there was a sort of tipping point with if government debt went above about 90% of GDP, that had a big negative impact on economic growth.

A lot of that evidence has now been debunked and I think economists, most economists these days don't think there is a clear relationship or some critical threshold above which we need to be especially worried.

But there is potentially still some reason to think that we don't want government debt to get too high because there could be negative feedbacks onto other aspects of the economy.

Aaron Powell, And just to remind everyone listening, GDP, gross domestic product, essentially the value of everything we make, do, sell as a country.

Okay,

we need to talk about the deficit.

I want a definition of the deficit I can just very quickly and easily pull out and impress my friends with.

What should I say?

Very simply, the deficit is just the gap between the amount the government spends in a year and the amount it raises in tax revenues and other types of receipts.

So it's just the amount we borrow?

It's just the amount we borrow.

What happens if the economy doesn't grow, or if it doesn't grow as fast as the debt?

If the economy doesn't grow or it grows only very slowly, that does make it harder for the government to keep the burden of debt under control.

And if we look back at the period after the Second World War, the UK ended the Second World War with debt at about 250% of GDP, so extraordinarily high level.

Over the following decades, the government actually borrowed in most years, but because the economy was growing quite rapidly, the size of that debt relative to the size of the economy diminished quite rapidly.

What's happened more recently is economic growth rates have been very slow, and that has meant that our debt to GDP ratio hasn't diminished in the same way that we saw in the decades after the Second World War.

How are we, you, me, the public, how are we affected by how much national debt we have?

The main way that we're affected is because the government each year has to use some of our tax revenues to pay the interest on the debts that it has.

There might also be impacts from government borrowing and government debt onto the wider economy.

If the government is borrowing money, then that's potentially money that isn't available to private sector debtors.

So possibly if the government is using that money less effectively than someone in the private sector could, then there could be a relationship between government borrowing and sort of the strength of the economy more broadly.

Oh, and that's why some people have theorised then that the higher higher the government debt, the bigger the drag factor on the economy.

Exactly.

Dr.

Gemma Tetlow, thank you very much.

So, national debt is something we need to know about.

It's not something we need to worry about too much.

Few countries exist without debt, and as long as the economy grows, then even rising debt doesn't have to be a problem.

But when the economy doesn't grow much for a long time, especially if it's an expensive time for the country's coffers, then it can become more of an issue.

But ultimately, you have to remember this is a country's debt.

It's not the same as you maxing out your overdraft.

So I'm afraid we might owe two and a half trillion as a nation, but you can't use that to play down your credit card bill.

Now, next time we're looking at bankruptcy, it is unpleasant for the people going through it.

What does it mean for the rest of us?

Understand the Economy was presented by me, Felicity Hanna, produced by Louise Clark Robotham.

The researcher is Beth Ashmead Latham, and the editor is Claire Fordham.

It was mixed by Nikki Edwards.

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