Updated November 2022
UK government debt is once again in the news following the Covid crisis and now the cost-of-living crisis and rising interest rates.
Our experience from debt crises around the world shows that government debt can lead to huge challenges for people in affected countries. But it is also the case that debt can be used as an excuse to push policies to take away public services and social safety nets from people when there is no need to do so.
From the global financial crisis until 2022, the UK government’s debt payment burden was at record lows and it could borrow at the lowest interest rates in history. This was a historic opportunity to invest in ways that would both tackle key challenges such as the climate crisis and providing affordable housing, and in ways which would save public money. For example, borrowing to invest in public housing and renewable energy.
The opportunity to invest at the lowest ever interest rates was missed. We warned that while UK government debt was not a major vulnerability for the UK economy, the large debt burden of households and companies, and the UK’s financial imbalance with the rest of the world, left the country exposed to serious financial risks. Furthermore, the UK has one of the lowest rates of taxation in G7 and European countries, leaving public services chronically underfunded.
In 2022, Russia’s invasion of Ukraine, the climate crisis and financial speculation on food and energy have led to large increases in prices. This has put even more pressure on UK households, while the UK government has borrowed more to fund measures to provide – inadequate – protection for people from the increase in prices. Interest rates have also been rising as Central Banks across the world have attempted to bring inflation down. The mass tax cuts for the rich in the ‘mini-budget’ of September 2022, some of which have now been reversed, also led to speculators increasing the interest rates at which they would lend to the UK government.
This means that interest rates on new UK government borrowing have been rising. As of November 2022, the interest rate for the UK government to borrow a loan due to be repaid in 10 years is 3.2%, compared to 0%-2% over the previous decade, and 4%-5% before the 2008 financial crisis.
The current crisis for the UK economy is worse because of the failure to tackle challenges over the last decade. The UK has remained a net importer of goods, especially fossil fuels. The cost of housing has kept on increasing, whether to buy or rent. Households have continued to have large debts. These factors have all made the UK more vulnerable to the current problems of higher energy prices and interest rates.
The UK government should be spending more to protect people from the impacts of the cost-of-living crisis, both in the UK and around the world, to improve public services and to help tackle the household debt crisis. This could be funded by increasing taxes. Most obviously there should be increased taxes on energy companies, who are currently making huge windfall profits from the cost-of-living crisis. The UK could also significantly increase tax revenue from richer people and companies, including through increased taxes on wealth as well as income.
Tax is vital to ensure the UK can provide decent public services and social safety nets. But government borrowing can also still be used as well – in particular to help respond to sudden economic shocks, and to invest in ways that will save the government and the wider economy money, while also tackling challenges of poverty, inequality and climate change.
The UK government’s debt payment burden is still far lower than many lower income countries. Interest rates on loans to lower income countries are much higher, much of the debt is owed in foreign currencies rather their own currency, and more of the debt is owed to people outside the country. In such situations, the government debt burden is actually undermining the ability to provide public services and meet basic needs. The UK therefore needs to help create a comprehensive debt cancellation process for lower income countries, so they can also tackle current crises, rebuild and have the resources to confront the climate emergency.