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The True Scale Of National Debt - UK

by Chauncey Tinker – 18 Apr 2022

Concerns about the size of the national debt are generally downplayed by people who draw our attention only to the official debt to GDP ratio. See for example this link from Statista for a graph of the UK debt to GDP ratio over time:

Although the ratio is high now, before 1962 it was higher, and immediately after WWII it was a lot higher.

After World War II there began a period of seemingly endless economic growth, and so governments didn't have to worry too much about increasing government spending commitments, because tax receipts kept rising. UK Governments also received a bonanza in the form of North Sea Oil revenues, which are now dwindling. From the Times:

Now we are entering a period of greater uncertainty where energy prices are rising (partly also it has to be said due to government policies) and competitor nations, particularly China, have undermined our economies in the West with cheaper goods.

This graph from Trading Economics shows how the Bank of England interest rate has been nearly flat at almost zero since 2008 (click on 25 year link):

Back in the year 2000 the rate was nearly 8%, and in 1979 it was raised way up to 17%! Imagine how big your mortgage payments would be if interest rates went back to that sort of level! (Note that the rate has recently risen but only to 0.75%). In a similar way, if the rate went back to previous levels then the government would have to start offering higher interest rates on bonds that it issued, increasing the amount it had to pay in future interest payments. Inflation is now on the rise again (also partly due to deliberate policies), and so central banks may possibly have to consider raising rates again.

A government doesn't just have to pay the interest on government bonds, and repay the amount loaned at the end of the bond's term, a government also has to keep meeting its "unfunded liabilities", which come in the form of commitments to certain policies that it and previous governments have promised the electorate in the past, these include for example welfare payments. The problem that is often overlooked is that while the debt-to-GDP ratio may not look all that bad right now, those unfunded liabilities just seem to keep on growing, as successive governments make promises to the voters that then have to be met by future governments.

To understand how much unfunded liabilities have risen over the years, let's look at a few examples, first let's look at spending on the National Health Service (NHS). Look at this graph showing spending in the UK on the National Health Service as a percentage of GDP, from the Nuffield Trust:

From the graph you can see that although periodically there have been attempts to reduce NHS spending, the overall trend since the NHS was created has been ever-upwards, in fact the graph shows more than a doubling over the entire period from around 3% to over 7% of GDP. Notice that the rise was particularly steep during the period when New Labour were in power, then after 2010 when the Tories were back in power there was some slight reduction, but only back to the 2008 level, not to anywhere near the levels of the 1980s. In other words the Tory government is burdened with the huge increase in the ongoing cost of funding the NHS that is partly a result of policies introduced during the New Labour period.

Second let's look at state pension liabilities. From the Institute of Economic Affairs (2011):

Again as with the NHS, the trend seems to be ever upwards. From the FT Adviser (2021):

If a government today promises to pay pensions in the future, but the government doesn't have the reserves to cover those future costs, then the government is effectively taking on debt by making those promises. The idea with the National Insurance contribution system was that you would pay into a fund that would not be used for government spending, the contributions would be set aside and the contributor would later get pension payments in line with what they had paid in to the system. However, according to all the sources I could find on the subject the system is to all intents and purposes now just a more complicated (and much more opaque) form of income tax. I spent some time trying to understand how the system works and came to the conclusion that to call it opaque is actually an understatement, if you can shed any better light on it (particularly with reference to those above estimated links on unfunded pension liabilities) then please share your knowledge in the comments below. I looked at this link from the UK government:

I had a look at the section titled 16 Receipts and payments account, it shows a small surplus for that year. It also shows most payments are being covered from NI contributions for the same year however, the income from "investment account" and other sources are tiny by comparison. My conclusion from this is that it seems to be true that NI is indeed just another form of income tax, and in a serious recession those NI contributions could substantially diminish. Contributions made apparently don't bear much relation to the amount an individual later receives and also, if there is not enough money in the fund to pay the pensions in any year then apparently the Treasury just steps in and tops the fund up accordingly. State pension commitments are getting larger over time as well, because the UK population is ageing significantly (we have a lower than replacement total fertility rate). A map from the ONS shows this problem from 1996 to 2036 (see Figure 1, UK population aged 65 and over, aged 85 and over and the old age dependency ratio by local authority, 1996 to 2036, and click play):

What's more, increasing life expectancy means we live a greater proportion of our lives while being eligible for state pension, yet the age of retirement has remained static, so the burden on the state has greatly increased. Recently (since 1995) the UK government have been slowly raising the retirement age (and equalizing the age for men and women), but so far not by anywhere near the same amount that life expectancy has increased. When the age of retirement was originally set at 60/65 the average life expectancy wasn't much above that, so governments did not expect to have to pay the state pension to the average individual over many years. To see how radically that situation has changed have a look at the first graph in this link from the ONS:

The graph shows a rise for women from 71.5 in 1951 to 82.8 in 2011, and a rise for men from 66.4 in 1951 to 79 in 2011.

Another area where government commitments increased substantially during the New Labour years was in education, particularly further education. The number of young people going to university greatly increased, and so those young people either disappeared from the unemployment statistics while still being a burden on the state, or did not go into tax paying occupations until they were a little older. From the BBC:

The student loan system was supposed to ensure that students later paid for their more expensive education, but according to some sources as many as 83% of students never repay their student debt:

Of course it would be nice to think that a better educated population is more productive, but given some of the courses being "taught" in universities these days it is very questionable I fear that this change has had such an effect.

SUMMARY

To understand the true scale of national debt we must add the unfunded liabilities to the official national debt figure. As the total size of those unfunded liabilities has grown substantially over the years, particularly state pension and NHS commitments, the true scale of national debt may in fact be greater than it has ever been before. The official government debt of over £2 trillion is a big amount, but according to the above links the true scale of our national debt may be many multiples of that (it would take more time than I have unfortunately to try to calculate the figure exactly, but hopefully the above information and links should give some sense of the size of the problem).

Since 2008 very low interest rates have been keeping the deficit at a manageable level, artificially creating the impression that government spending was under control. However as interest rates now start to rise in line with expected increases in inflation, unless government policies change the deficit is soon going to start to grow to reflect that huge debt. My own opinion is that current levels of government spending in the UK are unsustainable. With dwindling prospects for economic growth the government is going to soon be forced to rein in spending, or raise taxes, or further increase the retirement age, and of course none of these solutions is going to go down well with the voters. Is it time the government and the media started telling the public the truth about the true scale of national debt?

RELATED ARTICLES ELSEWHERE:

From the ONS:

From the Institute for Fiscal Studies:

From the Institute of Economic Affairs:

I suppose a counter argument would be that at least the existence of the NI fund reminds the government that those unfunded liabilities the fund is supposed to cover will have to be met somehow.

From the Telegraph:

From the Money Saving Expert:

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