The UK's national debt is likely to hit £4trillion in the next decade, but four things matter more when it comes to Britain's borrowing binge, an expert says.
Currently, total UK debt is just shy of the £3tn milestone, at a whopping £2.985tn, or 94.1% of Gross Domestic Product (GDP). But a long-term forecast from the non-profit National Institute of Economic and Social Research (NIESR) shows the UK looks "likely" to breach £4tn in 2036.
Forecasts point to £4tn breach
This compares to the analysis of International Monetary Fund projections by economist George Buckley at the finance group, Nomura, who suggests it could hit that figure in 2033. Projections from the Office for Budget Responsibility in July show that public sector net debt is expected to be about 95% of GDP, or around £3.75tn, on March 31, 2033.
UK borrowing figures underline the fiscal squeeze facing Chancellor John Healey ahead of his first Budget on October 28.
Four factors that matter more
NIESR Senior Economist Peter Dixon told the Daily Express reducing Britain's debt burden requires stronger economic growth, tighter control of day-to-day spending, restraint over age-related expenditure and higher taxes - or a combination of all four.
He said: "While the maths is straightforward, the politics is considerably harder." Mr Dixon cautioned that focusing on Britain's debt level is not particularly informative.
The expert said what matters is the size of the economy, the interest rate paid on debt, the economy's growth rate, and the maturity profile and currency denomination of the debt.
He explained: "These factors determine the size of the debt relative to the country's capacity to service it.
"While absolute reductions in the debt level are not unknown, history suggests such events are rare and certainly not sustained for any length of time."
Debt-to-GDP ratio outlook
Mr Dixon said the best the Chancellor can realistically hope for is to limit the size of Britain's debt relative to GDP.
NIESR's forecast suggests the UK's debt-to-GDP ratio will rise slowly in the near term, reaching around 98% in 2029, before declining. By the time the debt level breaches £4tn, NIESR forecasts that the debt-to-GDP ratio will have fallen back to about 90%.
Debt-to-GDP compares total government debt with annual economic output. While the UK's debt burden appears huge, it is dwarfed by the United States' figure, which recently hit £29.4tn (US$40tn). Its debt-to-GDP ratio is 125.8%, according to the IMF.
Henning Diederichs, Director for Public Sector at the ICAEW, said generating more economic growth would increase tax receipts and the size of the economy.
This would help shrink the annual deficit and the national debt as a share of GDP in the medium term, according to the expert. But he said the Chancellor's options are limited.
Mr Diederichs explained: "The need to retain the confidence of debt markets means the Chancellor’s choices are constrained in the amount he can borrow."
The map above shows debt-to-GDP figures for countries around the world. While it provides a general overview, it should be treated with caution as countries' economies, data, and national accounting standards can vary.
It shows the UK has a higher debt-to-GDP ratio than Germany (62.2%), Denmark (31.1%) and Poland (55.1%), but lower than France (113%), Spain (102%) and Italy (135%).
