A glimpse of the news or read through the UK’s newspapers will bring you similar takes on the same situation. The UK’s national debt has reached the trillions, and the future will be one of gloom. we can’t claim that the UK is in a great financial position; the press's mantras don’t tell the whole story.
Let’s take a look at the UK national debt and what it means in context, then, how the future may NOT be one solely dominated by the doom-mongers.
Current National Debt Summary
To start with, let’s take a look at the figures. In May this year, the UK national debt reached £2.6 trillion. State borrowing more than doubled, with the government partaking in a tidy £20 billion.
To put this into perspective, a British trillion now works out at 1,000,000,000,000. This was once the designation for a British billion. A billion now stands at (a mere!) 1000,000,000, per US methodology.
As a positive aside, May’s borrowing was £3 billion lower than the previous month. However, it was more than £10 billion higher than in 2022. Yep, that’s a lot of money.
Unsurprisingly, many commentators have a grim outlook on the UK economy, some calling it a crisis. But understanding the national debt in practice can help us keep a bit of perspective.
Why Do We Have a National Debt?
Although we might try, none of us can truly predict the future. Events at great expense to governments and citizens alike can occur at short notice – like pandemics, wars, or financial crises.
To stimulate the domestic economy during difficult economic times, governments tend to increase spending, whilst lowering taxes to enable people greater prosperity. Furthermore, governments often have to borrow money to enable such a policy. It’s a tried-and-tested model, based on Keynesian economics. The intended result is to stimulate the economy and ease the burden on the population, although it also creates a national debt.
Why is UK National Debt NOT a Cause For Panic?
Wealth management is difficult for all of us. It’s fair to say the national debt is more complex than most.
However, national debt only tells one side of the story, and the other concerns gross domestic product, or GDP. GDP is the amount of money a country makes through the products or services it grows and produces. As a result, it’s a great indicator of a country’s economic worth.
Imagine that you’re a professional on a decent wage. Every month, £2,000 leaves your bank account to pay for everyday essentials. This can include a mortgage, home repairs, pension, food, cars, and your children’s education. That’s £2,000 of monthly debt, a figure that would keep most of us awake at night.
However, if your net income is £3,000 per month, that actually leaves you £1,000 in profit every four weeks. Your debt might be high, but your wage can cope with it. Transfer this to national debt v GDP, and we have a much better vision of the UK’s current economic situation.
UK National Debt v GDP
The UK national debt as a percentage of GDP stands at 100.1%. That means the UK’s monetary output is virtually-equal to its debt. If we take an economic lesson from history, the 2007 Financial Crisis saw this figure come close to 100% but not exceed it. In contrast, the Second World War resulted in a high of nearly 250%.
Comparing these figures suggests that not all is doom and gloom. Given sufficient time, the UK should be able to manage its situation and emerge with an eye on future prosperity. It’s also worth remembering that, despite the 200%+ figures of the 1950s, a Labour Government in the UK was able to deliver a National Health Service and Welfare State. Life will continue amid national debt, and sometimes changes can be made for the better.
No one can claim that the UK is currently in economic raptures. The cost of living has risen dramatically, interest rates dominate the market, and the fallout from Brexit has seen businesses relocating. But talk of the national debt as the death knell for the UK’s economy is greatly exaggerated.
The UK’s national debt as a percentage of GDP is currently on par or better than many other leading economic powers and European neighbours. France’s stands at 98.1%, Spain’s at 95.5%. Germany’s may stand at 69.3%, but the US is at 129%, China at 76.9%, and Japan at a whopping 262%.
Perspective is everything, and for the UK’s economy, there’s the promise of better days to come.
Discuss the health of your own personal financial situation by speaking with our Senior Wealth Manager, Michael, for an unbiased and expert view today.