The United Kingdom’s government is broke. It is something that is almost never spoken of, but it is true, nonetheless. Our politicians spend a lot more than they collect in taxes and they have done so for a long time: we have run a public sector budget deficit for all but five of the last 50 years and every year since 2000. In the last fiscal year, which was of course impacted by the Covid lockdowns, the deficit was an enormous 15% of GDP.
The increasing deficits have happened despite tax revenue being on a steep upward trajectory, almost tripling since the turn of the millennium. But in the same period, nominal spending on welfare payments has more than doubled, from £59 billion a year to £142 billion, while spending on health care has quadrupled, from £50 billion to over £200 billion. The last major spending item is pensions, which has also more than doubled since 2000, to almost £170 billion. Every single government department has seen massive real term budget increases.
As a consequence of this profligate entitlement spending and systematic lack of budget discipline, the government’s debt has exploded and stands at £2.36 trillion, or 94% of GDP – and this excludes unfunded liabilities, mainly almost £1 trillion of pension commitments. To put the scale of the problem in perspective, consider that in those five years since 1972 where there was a surplus on the government’s finances, the combined value of those surpluses amounted to less than 5% of GDP. In other words, it seems totally inconceivable that the government debt will ever be paid back. That is a problem which has meant that the supply of government debt has, for a long time, vastly outstripped demand. The solution has been found in regulation requiring financial institutions to hold government bonds and, since 2009, in quantitative easing, the practice of the Bank of England buying government bonds – which it has done to the tune of almost £900 billion, so that the BoE now holds almost 40% of all UK government bonds.
It is perhaps surprising that, despite the apparent unsustainability of the government’s spending habits, budget discipline is a topic to which very little attention is paid by politicians and media alike. But after more than half a century where deficits have been the norm, they have by now been normalised to such an extent that they are considered a non-issue. We are so used to the government spending more than it earns that we just shrug our shoulders when politicians budget in ways that would signal imminent bankruptcy for a private person or business. This nonchalant attitude to the growing public debt burden has been helped significantly by the rise to fame of Modern Monetary Theory (MMT), which sees government deficits simply as a tool to regulate demand in the economy and claims that any level of debt is a non-issue for a government that can print its own money. While we vehemently disagree with MTT, it is, however, obvious that inflation will be the tool by which the government will solve its debt problem while avoiding a technical default, a phenomenon known as financial repression. And it is already happening: the public sector borrowed £152 billion in the financial year ending March 2022, but with price inflation approaching 10%, the real value of the debt burden is set to reduce even more over the next 12 months.
So, the government is broke, but it may never have to own up to that fact. A real debt crisis only occurs if maturing government debt cannot be refinanced, but with the central bank’s new role as a buyer of last resort, that is unlikely to happen, and with the government in control of interest rates as well (yes, the BoE is supposed to be independent, but it isn’t, really), they can prevent them from rising to where debt service becomes a problem. The way this plays out instead is by price inflation, officially at 9.1% (as of July 2022) but much higher in reality, which is likely to be with us for years. And we don’t need Weimar Republic levels of inflation to effectively wipe out the government’s debt; a decade of price rises as we have them now will do. The collateral damage is a decimation of savers and a sustained cost-of-living crisis, the likely political response to which is terrifying. You can read about it here.