Such is the size and scale of the bailouts needed to avert an energy crisis that is crushing millions of families and averting the collapse of thousands of businesses, a debt ratio that jumped from 83% to 94% in the first months of the pandemic and almost touched The 104% in 2021, it is now on track to remain in triple digits for the rest of the decade. Successive Tory chancellors have tried to prevent the national debt from rising to the size of the UK’s £2.2 trillion annual national income (gross domestic product). That’s not how households think about their debts. Most people with a mortgage would have a debt-to-income level of more than 263% of Japan if they measured the size of their outstanding loan against their annual income. However, debt-to-GDP has become the measure by which international investors judge a government’s ability to pay its own way. And so international lenders constantly monitor government spending deficits, because if they exceed economic growth, the debt mountain will grow. Paul Dales of Oxford Economics says that a brief dip in the UK’s debt-to-GDP ratio below 100% this year will prove temporary: “In four or five years it will look normal for the UK to be above 100%. ” The higher the debt, the more you pay in interest and the harder it is to reduce it again Philip Shaw, Investec In his first budgets as chancellor, from 2010, George Osborne pulled out all the stops to prevent the figure from going above 100% and then cut it down. Rishi Sunak was of the same mind until the pandemic forced him to spend an extra £400bn. Investec’s Philip Shaw says investors were more concerned about the government’s strategy than the level of debt: “I’m not taking a mystical stance and saying 99% good, 101% bad. But the higher the debt, the more you pay in interest and the harder it is to reduce it again.” The developed countries in the 100% club are diverse: Cyprus, France, Belgium, Spain, Portugal, Greece and Italy, as well as Canada, Japan and the USA. But according to Shaw, it’s not the level of debt that counts, but what governments do with borrowed money. Alistair Darling, Labor chancellor during the 2008 financial crisis, says investors want to see a coherent plan: “When the banks collapsed, I wanted to convey to the markets that while we needed to spend a large amount of money on save the economy, equally We had a sensible and coherent plan to reduce the deficit and a plan that encouraged growth.’ French President Emmanuel Macron has defended his country’s 114% ratio, saying the extra debt since he took office in 2016 has been used to invest in skills, increase tax breaks for investment and help families through the pandemic . This is similar to Gordon Brown’s golden rule when he was chancellor: that extra borrowing was only allowed to support investment. Dales says Liz Truss’ plan to boost growth by cutting income and corporation tax is flawed: “I’ve seen no evidence that the tax cuts are self-funding.” Shaw worries that months of government inaction – making investors even more nervous – means Britain will suffer a deeper and longer recession than many other industrialized nations. He says the UK’s lack of credibility can be seen in the rising level of interest the government is paying on its debts and the fall in sterling. Since Russia invaded Ukraine, the pound has fallen from $1.36 to $1.16 and is heading for parity. With the UK so dependent on imported raw materials and components, a weak pound increases inflation. High inflation, higher debt, recession and the energy crisis put the UK in a unique predicament.
