New Prime Minister Andy Burnham is celebrating his dream job, but a fiscal timebomb set by Gordon Brown nearly 30 years ago threatens to explode on his watch. The national debt has just passed £3trillion, a grim milestone that could undermine Burnham's ambitious plans.
A £3trillion Problem
The Taxpayers' Alliance argues the true burden is far higher, estimating the real figure at £12trillion once unfunded public sector pensions, PFI contracts, and nuclear clean-up costs are included. Whatever the exact number, it's too large for the human brain to grasp, and Burnham appears unable to get his head around it.
Instead of bringing the debt under control, the new PM is announcing more spending. Chancellor John Healey is reportedly considering fiddling with fiscal rules to unlock an extra £9billion a year of borrowing, every penny of which will add to the national debt and incur interest.
Brown's Stealth Raid
The hidden problem dates back to 1997, when Gordon Brown, then Chancellor, scrapped tax relief on dividends in a stealth raid on pensions. This destroyed Britain's private sector final salary schemes, forcing most private sector workers to gamble their retirement savings on the stock market with no guaranteed return. Only public sector workers still enjoy final salary schemes today.
Millions of pensioners are poorer as a result, but the damage extends further. Traditional pension schemes and insurers were major investors in UK equities and government bonds. When Brown made his move, they held 75% of UK gilts; today, that figure is below 20%. Overseas investors now hold a third of all gilts, including foreign hedge funds and offshore funds.
Reliance on 'Kindness of Strangers'
Britain is now dependent on foreign money to finance its government debt. As former Bank of England governor Mark Carney famously said, we rely on the "kindness of strangers," but these strangers are not kind. Many have short-term investment strategies and may dump UK debt if they are unhappy, leading to a crisis that can quickly spiral out of control, as seen with Liz Truss.
This is a key reason why UK borrowing costs are the highest in the developed world at almost 5%, a level that spooks markets. Every £1 in £10 the government spends goes on servicing interest, a waste that will only rise as the economy grows by just 1% a year while the population ages.
Denial and Delay
Burnham and Healey are in total denial, preferring easy popularity and keeping backbench Labour MPs sweet over facing the truth. The disaster is long in the making: Brown set the debt timebomb, and years of Tory austerity failed to defuse it. Burnham isn't going to tackle it either. He either can't hear the ticking or hopes to pass it onto the next PM before it explodes. As one day it will.
