High debt means we need high growth

High debt means we need high growth

The UK debt mountain, which is around £1.9trn or around 100% of GDP, is currently receiving a lot of attention. In a historical context, it is a large number and a good chunk of it was added in 2020 (£450bn).

 

Should we be worried? And if we are, what are we worried about?

 

The general population naturally believes that all this debt has to be paid back. We see the money being spent by the government in 2020/21 and quite logically there is the feeling that it cannot be ‘for ‘free’. Surely we have to pay it back? And shouldn’t we expect income taxes to rise and we subsequently lose out on economic growth? Not necessarily…

 

The debt stock, big as it is, does not actually need to come down. The government does not need to pay this back next year or the year after. In fact it is borrowing for longer and longer into the future, as far out as 2071. As long as we get economic growth, the debt as a percentage of GDP will fall. This is the equivalent of borrowing on a house - as long as the value of the house goes up and you can pay the mortgage, it’s not an issue.

 

It’s the point about the ability to pay the mortgage outlay (debt servicing costs) that is starting to become a concern for the government, not the size of the total mortgage. And it is likely to get more attention, as per the Chancellor’s comments at the March Budget:

 

“And while our borrowing costs are affordable right now, interest rates and inflation may not stay low for ever; and just a 1% increase in both would cost us over £25 billion.”

 

This sounds like a high number and it is − £25bn is around 1.3% of GDP. We are not overly concerned about this, however, or the size of the debt; the high debt stock is here to stay and we cannot see any chancellor trying to pay this down anytime soon.

 

Economic growth-friendly policies are needed and seem to be coming, whether that be VAT cuts, business investment subsidies or green investment initiatives. If these policies work, then a modest rise in interest rates and the large debt stock should not be a burden to future economic performance of the UK.

James Lynch

Investment Manager, Fixed Income

James Lynch is an investment manager in the Fixed Income team and is responsible for analysing UK government bonds and inflation-linked government bonds.

More about the author


Read next