Global

Details

  • Industry: Government & Public Sector
  • Date: 11/5/2013

Case study: Public debt in the United Kingdom 

By the time the global financial crisis began in late 2008, the UK had already posted seven consecutive annual budget deficits. Public finances quickly deteriorated further. Net public debt soared from 38 percent of GDP in 2008 to an estimated 86.1 percent in 2013.

Like so many advanced economies, stimulus measures and financial sector support “prevented the worst case scenario, but ... also extended the time frame over which imbalances would be unwound.”1


Significant challenges remain. Net-debt-to-GPD ratios are not set to peak until 2016 when they will reach 93.2 percent of GDP, according to International Monetary Fund (IMF) estimates.2 Debt interest payments will continue to squeeze program expenditure. Between 2011/12 and 2017/18, the share of spending devoted to servicing central government debt is forecast to rise from 7.4 to 10 percent.3


Until now, the UK has benefitted from low borrowing costs. However, interest rates remain sensitive to the reversal of quantitative easing and reduced investor confidence. Even a 1 percentage point rise in interest rates in 2013/14 would, by 2017/18, have added an extra £8.1 billion to yearly debt servicing costs (see Figure 1).4 Fiscal consolidation is needed while rates are still low.


Figure 1: The projected impact of rising interest rates on debt servicing costs



Public debt in the UK


Yet important steps have been taken towards achieving fiscal sustainability. Recognition of growing pension liabilities caused by population aging has seen a number of reforms. Mandatory retirement ages have been abolished. The eligibility age for state pensions has been raised.


The creation in 2010 of the Office for Budget Responsibility (OBR) signals a greater commitment to improved fiscal planning. The OBR is charged with producing independent economic forecasts and long-term assessments of the health of public finances. It has already been credited with depoliticizing the economic analysis used in the budgetary planning process.


1Craig Alexander. March 2013. America's Debt Woes" (PDF 649 KB). TD Economics.

2International Monetary Fund. 2013. “Fiscal Monitor - Fiscal Adjustment in an Uncertain World” (PDF 7.03 MB), pp. 71.

3 UK Government Budget 2013 (PDF 3.16 MB), pp. 22.

4Ibid.

 

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