The British government’s fiscal watchdog has expressed concern over the UK’s £2.5 trillion (€2.9 trillion)-and-growing debt mountain, and suggested policymakers in London are running short of options to address the problem.
Richard Hughes, chairman of the Treasury-funded but independently-run Office of Budget Responsibility (OBR), told a Westminster audience on Monday there were “reasons to worry” about the UK’s national debt, which recently topped 100 per cent of GDP for the first time in 60 years.
UK government borrowing is also at its highest level since the second World War era, while the annual interest bill of £100 billion, which is already at its highest relative level since the 1980s, has doubled in a year and would be enough to fund the second-biggest government department in Whitehall.
The recent crossing of the 100 per cent of GDP debt threshold was a “totemic Rubicon” for Britain, Mr Hughes told an audience of economists and journalists at an event hosted by the right-leaning, Conservative Party-linked think tank the Centre for Policy Studies.
The OBR has forecast that Britain’s national debt could be three times the value of its economy within 50 years unless the government reins in deficits. It said it could even hit 435 per cent of GDP by then if economic shocks continue to occur at the same rate that they have in recent decades.
The surging debt adds to the limits on UK chancellor Jeremy Hunt’s options to boost the economy ahead of his autumn budget in November.
Mr Hughes said the main reasons for concern were that “much more of our debt [now] is short term ... [meaning] the public finances will feel the pain much more quickly”. He also warned that the ability of the UK to “inflate the debt away is no longer true”, as up to a quarter of the UK’s national debt is now inflation-linked, meaning the payments rise in line with general prices.
“More and more of our national debt is now in foreign hands,” said Mr Hughes. “The proportion used to be 13 per cent but that has risen in recent years to 25 per cent, second-highest in the G7.”
He said the UK economy had coped with debt levels of above 100 per cent of GDP before, but the last time it happened, in the 1960s, there was a productivity boom as women entered the workforce in much greater numbers. That contrasts with now, he said, with defence spending likely to continue to rise in coming years and an ageing population placing strain on social services.
Dr Gerard Lyons, a former Standard Chartered economist who was Boris Johnson’s economic adviser and was once said to be in the running to be governor of the Bank of England, said the UK’s options for escaping a “debt trap” were narrow.
“A debt trap happens when the cost of servicing your borrowing is higher than your economic growth rate,” he said. The UK’s economy is barely growing at a rate of less than 0.5 per cent of GDP.
“Something has to give. Can you get growth? It is the solution [to the UK’s problems] but nobody has the answer to bring it about.”
Dr Lyons, who was born to Irish parents in Kilburn, singled out the Republic for praise for its fiscal policies, in his contribution to the audience above the Old Queen Street cafe, a hundred yards away from the UK’s Treasury headquarters.
He told them that along with the US tech hotbed of Silicon Valley, Ireland had been the best-performing region in the western world for generating economic growth through public policy.
“They [achieved this] with their education system and their low corporate tax policy. Some economists may criticise the quality of the data coming out of Ireland, but I was there recently visiting family and the mood among people seemed so positive [compared to the UK].”
Mr Hughes warned that using the UK’s tax system to promote investment in the economy could be “very expensive”. He said international trade was historically a better way of promoting growth, but that the UK’s options in this regard were “closing down”. He said there may, however, be grounds for optimism in the growth of artificial intelligence, which he suggested might spur economic growth.
He also said he hoped that future scientific and medical advances could tackle health issues such as obesity and dementia, which in addition to their human cost have a large economic cost in terms of the need for the provision of public services.
