The national debt
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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 20th 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 drove 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 rapidlyescalating military expenditure during the two World Wars. Debt reached a peak of 252% of 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 WWII and the mid-1970s, the ratio of debt to GDP fell sharply thanks to sustained growth 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 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 are partly attributable to perception of the credit-worthiness 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.
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.