In the weeks of media speculation ahead of the UK budget, government debt has dominated the headlines. The threat of a “debt crisis” is often used to justify cuts in welfare spending and public services.
The UK government’s debt situation has changed in recent years, with an increasing amount of spending going on interest payments. But the financial challenges facing the government are not like those of lower-income countries – UK borrowing costs are far lower, all government debt is owed in its own currency and debt payments that leave the country are low compared to other countries.
Between 2008 and 2022 the interest rates the UK government could borrow at were the lowest ever recorded. Those years were a historic opportunity to invest in ways that would save the government and people money, such as social housing, insulation and renewable energy. That opportunity was missed, government borrowing is now more expensive, and the amount spent on interest payments is higher. But the UK still needs increased spending on public services and investment to respond to challenges of poverty, inequality, the climate crisis and an aging population. Progressive taxation, including our calls for an overhaul of regressive council tax, is needed to meet these challenges.
In many lower-income countries, the far higher level of debt payments is causing drastic cuts in public spending, because it leads to huge amounts of resources leaving the country. In the UK, the real barrier to tackling poverty and inequality isn’t government debt, it’s the lack of political will to tax the rich. However, in many lower-income countries large debt payments which leave the country are making it impossible to tackle poverty and inequality. Where this is the case, debt needs to be cancelled. The UK can play a key role in this because most of the high-interest debts owed to private lenders are governed by English law. The UK can pass a debt justice law to ensure private lenders take part in debt relief.
Government debt as a percentage of GDP
You’ll hear a lot about the debt-to-GDP ratio in the reporting around the budget which is what it says on the tin – the amount of debt owed as a percentage of GDP. But this is a useless statistic, as it tells you nothing about the real costs of debt for a government. Debt-to-GDP says nothing about interest rates, how much revenue a government has with which to pay the debt, who the payments are to, and what currency the debt is owed in.
Instead of obsessing over debt-to-GDP, what matters are the following four aspects of debt that are often ignored.
Interest rates
The UK government can borrow at 4.5% interest a year. This is massively lower than global south governments. For example, this month Republic of Congo took out a loan at 14% interest, Laos over 11% and Nigeria around 9%.
Current UK government interest rates are standard in historical terms. Between 2000 and 2008, UK government interest rates were 4%-5.5%. Before 2000 they were significantly higher. The anomaly was 2008 to 2022 when rates fell to record lows, often below 2%, following the global financial crisis. This was a historic opportunity for the UK to invest in public services and a just transition to a greener, fairer economy. Instead the government made a political choice to implement austerity, slashing public spending when it could have been taking advantage of record low interest rates to invest in the future.
When interest rates were low in the UK and the Western world, financiers pushed loans to lower-income countries where they could charge much higher interest, usually 6%-10%. This build-up of high-interest debt in the 2010s has led to many of the debt problems facing lower-income countries today.
What currency the debt is owed in
All of the UK government’s debt is owed in its own currency, giving the UK far greater control over repayment. By contrast, many lower-income countries’ debts are owed in foreign currencies, primarily the dollar, but also euro, yen and renminbi. To pay foreign currency debts, lower-income countries use scarce foreign currency revenues earned from exports, limiting how much is available for vital imports and investments.
Owing debts in foreign currencies makes lower income countries highly vulnerable to currency speculation. Financial speculators can drive sharp falls in the value of local currencies that can rapidly increase the relative size of debt payments overnight. This can also lead to rapid and severe shortages, and so price increases, of imports such as fuel, food and medicines.
Who the debt is owed to
Three quarters of the UK government’s debt is owed to companies and people in the UK, such as pensions funds and insurance companies. This also includes the Bank of England, which owns over 20% of the government’s debt, as a result of the quantitative easing policies of the 2010s following the global financial crash and in response to the Covid-19 pandemic. The Bank of England is now gradually selling off this debt, which is one of the reasons UK government interest rates have increased in recent years. Just a quarter of UK government debt is owed to people and companies outside the UK.
Debts owed to people outside a country are far more problematic than those owed domestically. Payments on these debts leave the country, whereas domestic payments stay in the local economy. Foreign lenders also pose a greater risk of suddenly stopping lending compared to a domestic pension fund or insurance company.
UK government debt payments which leave the country are just under 7% of the government’s revenue. In lower-income countries, on average 17% of government revenue is spent on such external debt payments and in some cases it is far higher – Kenya spends 25% of government revenue on external debt payments, Senegal 30% and Pakistan over 35%. And the highest in the world is Angola, which spends over 60%.
You can see how external debt payments compare around the world in Debt Justice’s Debt Data Portal.
Public spending cuts
In the last decade UK public spending per person, not including interest payments, grew by just 15%, less than 1.5% a year. This is not enough. Many places around the country have seen their local services cut and infrastructure crumble from a sustained lack of investment, while challenges like tackling child poverty and the climate emergency remain unaddressed. Again, this is the result of political decision making, not to introduce progressive taxation measures to address these deep inequalities.
In lower-income countries with high debt payments, the situation is even more pronounced. For countries with loans from the International Monetary Fund (IMF), that have high debts, but where the IMF says austerity rather than debt relief is needed – education spending has been cut by 16% and health spending by 18% in recent years.
Lower income countries urgently need significant increases in public spending on health, education and social services to reduce poverty and tackle gender inequalities. But the debt crisis is causing the opposite to happen – essential public services are being starved of funds which is fueling worsening poverty and inequality.
Conclusion
When it comes to debt, the UK government does have a significant debt burden but also has far more flexibility than lower-income countries that face much higher borrowing costs, see vital resources drained overseas and are vulnerable to currency shocks. The UK can play a decisive role in addressing this injustice in lower-income countries by passing a debt justice law to ensure private lenders take part in debt relief. In the UK, progressive taxation is essential to tackle poverty, inequality, and chronically underfunded public services. The government has the tools to confront both the global debt crisis and the economic hardship millions face in the UK—it simply needs to use them to build a fairer economy.