In the continuing sovereign debt crisis engulfing Europe the Washington Post reports that the UK is considering severing its ties with the European Union after talk of a referendum surrounding membership was raised by the Prime Minister, David Cameron. But how bad is the UK's debt and how does it compare with previous debt levels over the last century? Dominic Webb takes a look in our continuing series of extracts from the upcoming book, Olympic Britain, showing through statistics the changing face of Britain since the previous London Olympics of 1908 and 1948.
The national debt recently exceeded £1 trillion for the first time and is currently equivalent to around two-thirds of annual economic output (GDP). But the UK government has a long history of indebtedness, and for most of the twentieth century, its debt was much higher, as a share of GDP, than it is now. The power to tax, raise revenue and print money has made the government a safe bet for creditors over the years: there are still £167m in perpetual debts, known as Consols, left over from the Napoleonic Wars that the government has been paying 2.5% interest on since 1902.
War has driven the trajectory of debt during the first half of the 20th Century, too. In each year between 1918 and 1963, the stock of national debt was larger than annual GDP, due largely to rapidly escalating military expenditure during the two World Wars. Debt reached a peak of 252% GDP in 1946, the same year as the National Health Service and National Insurance Acts. It is hard to imagine the Government embarking on the creation of the welfare state with debts worth more than twice annual output, but there are important differences between then and now. Firstly, capital and foreign exchange controls meant British lenders could not freely buy bonds issued by governments abroad, meaning there were fewer alternatives to UK Government debt for investors. Secondly, around a third of the Government’s debt was in the form of post-war loans provided by the US Government on concessional terms.
Between the end of the Second World War and the mid-1970s, the ratio of debt to GDP fell sharply thanks to sustained growth and budget surpluses in every year from 1947 to 1974. This trend has been reversed in recent years: debt nearly doubled from 36% of GDP in 2006 to 66% in 2011. This reflects both the large budget deficits and the fall in GDP which have occurred in the wake of the 2008 financial crisis, together with rapidly-rising health and pensions expenditure in the years preceding it. Debt is forecast to continue rising to over 76% of GDP in 2014/15, before falling slightly.
Government debt must be financed. Thanks to interest rates that are lower now than at any time since 1897, the cost of servicing this debt is smaller, as a share of GDP, than during much of the 1980s, although the trend is sharply upwards. These low rates on are partly attributable to perception of the creditworthiness of the Government, but also reflect pessimism over the British economic outlook, with attendant low inflation, together with risk aversion, and the shortage of safe assets in the wake of the financial crisis.
Seeing Red. This chart shows the UK’s national debt measured as a percentage of GDP. Note: National debt data from 1900 to 1973; public sector net debt from 1974.