Soaring National Debt
In the past fifteen years, the ratio of national debt to gross domestic product (GDP) has tripled, and further growth is anticipated, per the Resolution Foundation.
Impact on Public Services
A think tank has predicted that high levels of national debt will hinder the United Kingdom’s ability to finance public services and respond to economic crises.
Unprecedented Borrowing
According to the Resolution Foundation, this level of government borrowing during peacetime has not occurred in 300 years.
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The ratio of government debt to gross domestic product (GDP), an indicator of economic output, has tripled in the last fifteen years alone, according to the Built to Last report of the foundation.
Escalating Debt-to-GDP Ratio
The UK’s debt-to-GDP ratio rose from 36% in 2007 to 100% in May.
According to the report, this leads to challenges in financing services and escalating expenditures in anticipation of future economic crises.
Further, the debt ratio will increase, according to the authors of the report.
It is projected to approach 140% of GDP within the following half-century, assuming present market anticipations regarding the United Kingdom’s sustained high interest rates are accurate.
Refinitiv, a market data firm, predicts the Bank of England base rate will remain above 5% through December 31, 2024.
In an endeavour to remove funds from the economy with the purpose of curbing inflation and reducing expenditure, the central bank has increased interest rates to 5.25%. This adjustment renders borrowing more costly while increasing the incentive to save.
Since COVID-19 supply chain concerns raised expenses, inflation has been high. The situation was substantially exacerbated by the energy price spikes that followed Russia’s invasion of Ukraine.
The report estimates that a one percentage point increase in the base interest rate will result in an additional £15 billion in financing expenses for the government in five years due to the growing amount owed on that debt.
This expense might rise to 5% of GDP, the highest in over 70 years.
Debt reduction is one of Prime Minister Rishi Sunak’s five major priorities, emphasising its political relevance.
The report includes criticisms of government expenditure and recommendations for the Bank of England to adopt a new monetary policy.
The report identified two specific forms of state assistance that were inadequately targeted. The first was the “generous” grants provided to self-employed workers who failed to report income declines during the COVID-19 years. The second was the universal nature of household energy supports, including the energy price guarantee, which was extended to customers until June 30 in order to assist with energy bills.
The Resolution Foundation estimates that targeting financially disadvantaged people might have saved £35 billion.
Recommendations for Economic Policy
The report further recommended that monetary policy be adjusted by increasing the target rate of inflation from 2% to 3%. This change should only be made after interest rates have dropped and inflation has reached 2%.
