UK National Debt

The Birth of the National Debt and the Napoleonic Wars

The concept of a national debt in the UK dates back to the late 17th century with the establishment of the Bank of England in 1694. This institution was created primarily to fund the government's war efforts against France.

This marked the beginning of a system where the government could borrow money from the public and institutions.

The national debt saw its first major surge during the Napoleonic Wars in the early 19th century. To finance the prolonged conflict, the government borrowed extensively, pushing the national debt to a staggering 200% of the country's GDP (Gross Domestic Product) by 1815.

Strategic Advantage: The ability to borrow on such a scale was a significant advantage, allowing the UK to fund its military and ultimately achieve victory.

Economic Burden: The immense debt placed a heavy burden on the economy for decades to come, with a significant portion of government revenue being used just to pay the interest.

The World Wars and Post-War Recovery

After a period of gradual reduction throughout the 19th century, the 20th century brought two world wars, which again led to a massive increase in the national debt.

Both World War I and World War II were financed through extensive borrowing. By the end of WWII, the national debt had once again soared to over 200% of GDP.

The post-war period, however, saw a remarkable and sustained reduction in the debt-to-GDP ratio. This was achieved not primarily through austerity, but through a combination of:

Strong and sustained economic growth: A growing economy meant that the debt became smaller in relation to the nation's income.

Moderate inflation: Inflation eroded the real value of the debt.

Financial Repression: Interest rates were kept low, making it cheaper for the government to service its debt.

This period also saw the 1976 sterling crisis, where the UK had to seek a bailout from the International Monetary Fund (IMF), a stark reminder of the country's economic vulnerabilities at the time.

The Late 20th Century to the Present Day

The late 20th century saw the national debt fluctuate with economic cycles. However, the early 21st century brought a series of events that caused the debt to rise sharply again:

The 2008 Financial Crisis: The government had to borrow heavily to bail out the banks and to cover the fall in tax revenues during the subsequent recession.

The COVID-19 Pandemic: Unprecedented government spending on schemes like furlough and support for businesses led to a massive increase in borrowing.

The Energy Crisis: Caused by the Ukraine War, Government support for households and businesses with high energy bills added further to the national debt.

As a result of these crises, the UK's national debt now stands at almost 100% of GDP.

How Does the UK Compare to Other Countries?

While a national debt of nearly 100% of GDP is high by recent historical standards for the UK, it's not an outlier among developed nations.

Among the G7 group of large, advanced economies, the UK's debt level is comparable to its peers.

Japan has the highest debt-to-GDP ratio, standing at approximately 237%.

Italy and the United States also have higher ratios than the UK, at roughly 135% and 124% respectively.

France and Canada have similar debt levels, both around 111-113%.

Of the G7 nations, Germany has the lowest debt-to-GDP ratio, at approximately 63%.

What Can Be Learned?

High debt is a common challenge: Many advanced economies are grappling with high levels of national debt, often as a result of the same global crises.

Economic growth is key: The most successful period of debt reduction in the UK's history was driven by strong economic growth. This suggests that a focus on sustainable growth is the most effective way to manage the national debt in the long term.

Credibility is crucial: While countries like Japan have managed very high debt levels for a long time, maintaining the confidence of investors is vital. A credible plan for managing the public finances is essential to keep borrowing costs low.

A Lesson from Germany: The 'Debt Brake': Germany stands out with its lower debt-to-GDP ratio, largely due to its long-standing policy of fiscal prudence. This is famously enshrined in its constitution as the Schuldenbremse or 'debt brake', which strictly limits structural deficits to just 0.35% of GDP. This commitment to a balanced budget (the Schwarze Null or 'black zero') offers important lessons.

The primary benefit is immense fiscal credibility, which ensures long-term stability and keeps government borrowing costs low. However, Germany's experience also serves as a cautionary tale. Critics argue that this rigid approach has led to chronic underinvestment in public infrastructure, such as transport and digital networks, potentially hampering long-term growth.

In recent years, Germany has had to create complex off-budget funds to finance crucial spending on defence and climate initiatives, highlighting the limitations of such a strict rule. For the UK, the lesson is one of balance: a clear commitment to a long-term, disciplined fiscal framework can build confidence, but it must be flexible enough to allow for vital public investment and to respond effectively to major crises.

The history of the UK's national debt shows that it is a constantly evolving challenge, shaped by major events. While the current level of debt is significant, history provides valuable lessons on how it can be managed, with sustainable economic growth being the most important factor.

See Wage Growth.