Eight months after coming to power and just two months after the Prime Minister’s promise to put more money in the pockets of working people by making the UK the ‘fastest growing economy in the G7’, latest figures show GDP growing by a sluggish 0.1% in the last quarter of last year (Oct-Dec 2024).
Yet while the economy technically grew, many were quick to point out that Britons were left worse off, as GDP per capita fell by 0.1%. This follows a 0.3% fall in the previous quarter, leading us at the TaxPayers’ Alliance to declare a personal recession – the third the country has suffered since the mid-2010s.
Even as the living standards of average households fall, the nation’s debt continues to rise at an astronomical rate. Our debt clock shows that more than £500 million is added to the debt every single day, or £24 billion since Christmas.
This is a serious problem, as households are ultimately on the hook for the debt through higher taxes. The key metric used to measure the affordability of the national debt is the ratio of debt to GDP. In other words how large the debt is compared to the nation’s total economic output.
As long as GDP grows faster than debt, debt actually shrinks – relative to our ability to pay, at least. That debt should be falling as a percentage of GDP is one of the Government’s ‘fiscal rules’. The Chancellor was actually on track to miss this target until she changed the definition of debt to include the Government’s financial assets and liabilities. On this definition, she meets the rule only by a slim margin.
This definition of debt has been used to allow more spending, but a different definition can force the Government to directly confront the issue of future economic growth. This is what we explored in our latest paper on debt to future GDP.
Whether Britain will be able to afford its debts depends on how the economy grows between now and when they are due. That is why alongside existing measures of debt, it makes sense to also measure current debt in relation to future GDP, which captures the effect of future economic growth and the extent to which it will make debt more affordable.
While the Office for Budget Responsibility already forecasts debt to GDP until as far as the 2070s, measuring current debt to future GDP establishes a clearer link between when borrowing occurs and when repayment is due. Most of the £2.3 trillion in government bonds are only due for repayment after 2029, with £744bn due after 2044.
Think about it this way. Imagine someone owes the bank £100,000. Sounds terrifying, but whether or not that debt is manageable depends not only on their present but also their future income. For a medical student straight out of university who is projected to earn a cumulative £600,000 to £1m by the time they are 40, it’s not that big of a problem. Conversely, for someone in their late-40s with few savings, extravagant spending habits and obsolete skills, this is a full blown crisis. Increasingly, the UK is looking more like the latter than the former.
Our paper shows the weak growth projected for the UK economy – confirmed last week by quarterly GDP figures –means that debt is a much more alarming problem than many realise.
In 1963-64, the last time debt was as large of a percentage of GDP as today, the country could at least look forward to future economic growth that would make the debt more affordable. While debt in 1963-64 was 94.7% of GDP, it falls to just 36.3% when compared to the average GDP of the next 15 years.
Today, the outlook is far more bleak. Debt in 2024-25 only falls from 93.9% of GDP to 67.3% of future GDP. In order for the ratio of debt to future GDP to be the same as it was in 1963-64, it would have to be a whopping £1.2trn less.
What this means is that the scale of debt is unprecedented in the post-war period. Debt to future GDP has been higher in the past (in 1956-58 to be exact), but it was on a downward trajectory then. Today, it continues to rise with no sign of falling.
Of course, none of this is set in stone. Our metric is based on forecasts, after all. The Government can still kickstart economic growth, although it seems to be doing the exact opposite by imposing punishing taxes on employers and investment in the latest Budget. Clearly, taxing and spending are a lot easier than growing the economy.
Measuring debt as a percentage of future GDP presents a stark choice. If the Government is committed to reducing debt, then it must either cut borrowing or grow the economy. Continuing to borrow and adding to our debt without economic growth to match it is a recipe for disaster.
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