UK Debt Burden From Current Crisis To Last 20 Years

Here are a couple of graphics related to the debt burden British taxpayers are likely to face over the cost of the current economic crisis:

First a graphic depicting net borrowing as  a % of GDP from 1980 - through the present, and projecting anticipated net borrowings through 2015.

Graphic courtesy of the BBC

Second a graphic depicting total government debt as a % of GDP from 1975 through the present, and projecting total government debt out until 2011.

Graphic courtesy of the WSJ

Both graphics come from a BBC news article discussing a recent study that claims that the debt burden from the current economic crisis will last for 20 years:

(From BBC News):

The burden of UK government debt will remain above pre-crisis levels for 20 years, says the independent Institute for Fiscal Studies (IFS), a think tank.

In its annual Green Budget, the IFS says that the government will need to raise taxes or cut spending by an extra £20bn to repair the public finances.

The IFS suggests the government may have to freeze public spending in 2010.

And it says that taxes are likely to go up more than planned, with possible increases in VAT in the future.

The grim arithmetic facing the government is laid out in their report.

Cost of the crisis

The government projects a budget deficit exceeding £ 100bn in the coming year.

The credit crunch will cost the chancellor £ 50bn a year (3.5% of GDP) in lost tax receipts and higher social security spending.

The government has already said, in its pre-Budget report (PBR) in November, that it will implement spending cuts and tax increases adding up to £38bn by 2015-16.

Even if everything goes according to plan, the IFS points out that it will be “the early 2030s before debt returns below the ceiling of 40% of national income” that Gordon Brown set as one of his key fiscal rules in 1997.

Of course, a number of other EU countries may still have a higher government debt-to-GDP ratio than the UK.

Borrowing Costs

In the longer term, a bigger problem for the government could be the rising cost of servicing (paying the interest) on the huge government debt.

These costs are currently relatively low, because investors - such as banks - are seeking to buy Treasury bills (gilts) as a safe haven in uncertain times.

“But there clearly is a danger investors will take fright at the state of the UK public finances,” which would push up interest rates, the IFS says.

The IFS says that if the cost of debt interest returns to the levels of the 1990s, then “further tax increases or spending increases would probably be required” to prevent debt costs rising unsustainably.

Looking at our own government’s credit crunch related spending we have at least 2 Trillion (and counting) for the bailouts and stimulus programs, in addition to the 100s of billions (if not over a trillion) worth of loan guarantees for various banks. Not to mention the additional strains an economic downturn puts on budget of the federal government and individual states, in the form of lost tax receipts, increased strain on social programs, etc.

When you add it all up it stands to reason that it’s going to take multiple years if not decades for us to discharge our credit crunch related debt, especially when you view it within the context of pre-credit crunch debt problems and pending liabilities from social security and Medicare.

The real question we have to ask ourselves is not only whether or not our government’s efforts to end/mitigate the current crisis will be successful, but whether or not long-term impact of the alleged cure will be worse than the disease itself.

Perhaps an even scarier proposition is that it appears that our government is going to spend 100s of billions on tactics that will either be ineffective and/or will merely delay the inevitable, meaning that we’re likely to spend decades paying for so called solutions that won’t even deliver a short-term benefit.

You can read more here.

Source:

BBC News: “Debt Burden ‘will last 20 years’” — Steve Schifferes, January 28, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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Comment by Claire

2009-02-03 20:07:37

Interesting article!
Thanks for sharing it ;-)

Reply to this comment