Due to the impact of the Covid crisis on perceived debt levels, the size of UK government debt is seen by many as a key challenge to be tackled.
These concerns are misplaced.
The UK government’s debt arising from the Covid crisis is not currently a problem because the UK government’s extra spending during the Covid crisis has been paid for by borrowing from itself, through the Bank of England. Furthermore, the government can borrow at the lowest rates in history and has the lowest interest payments ever.
The UK government’s debt payment burden is at record lows and its ability to borrow at record low interest rates is an opportunity. The government can use that ability to borrow to help recover from the Covid crisis and invest in ways that will improve livelihoods and save public money in the future. Areas where investments can be made now which will tackle key problems while also saving public money in the future include:
- The climate emergency and just transition
- The cost, availability, and quality of housing
- The major weaknesses in our social safety net
Investing now will help the economy recover from the crisis and so leave the public finances in better shape in the future.
However, the UK government has the third lowest rate of tax collection of G7 countries and is well behind other European countries.
Taxing richer people and companies more now would help tackle inequality and enable further progressive increases in public spending.
In the medium term the government needs increased tax revenue from richer people and companies to improve public services such as healthcare and to rebuild the UK’s social safety net.
Lower income countries are not able to create money and borrow at low interest rates in the way the UK government can. The UK therefore needs to help create a comprehensive debt cancellation process for lower income countries, so they can also tackle the crisis, rebuild and have the resources to confront the climate emergency.
Nine key facts everyone should know before discussing debt issues in the UK:
1. Two-fifths of UK government debt is owed to the UK government itself
2. The UK government’s extra spending during the Covid crisis has been paid for by borrowing from itself, through the Bank of England
3. Over four-fifths of UK government debt is owed to people and institutions in the UK
4. The UK government can currently borrow at the cheapest interest rates in its history
5. The UK government is paying the lowest amount of interest on its debt in recorded history, as a proportion of GDP
6. UK government tax revenue (as a proportion of GDP) is the third lowest of G7 countries, and well behind other European countries
7. The debt of the UK’s private sector is 2-3 times bigger than that of the government
8. The UK economy has the second largest deficit with the rest of the world of any rich country
9. The UK’s finance sector is the most exposed to a crisis of any G7 economy
For a more detailed explanation of each key fact read our briefing on UK debt.