Even as the deficit falls, rising national debt is a cause for concern. Politicians and civil servants must think about how policy commitments impact on the state’s long-term liabilities.
The deficit has been omnipresent in discussions about the austerity and the shape of our public services, but it is just part of the puzzle. Debt, and the effect that has on our public finances, has largely been out of the limelight.
As it stands the UK’s deficit stands at £96bn and is expected to be eliminated by 2018/19. Around 43% of the cuts are yet to come, so to quote Jon Bon Jovi, ‘we’re halfway there – living on a prayer’.
While the deficit has been coming down, the state’s debts have been increasing. This is inevitable, when government runs a deficit it needs to borrow to make up the shortfall in its spending.
As Deloitte and Reform outline in our State of the State 2014 report, in the past decade, UK government debt has trebled to £1.4 trillion, equal to £54,253 per UK household. As a percentage of gross domestic product, debt has risen from 33% to 79%. By the Maastricht Treaty’s calculations, UK debt would be 90.6% of GDP, meaning the UK would not meet the original criteria to join the Euro, even if it wanted to.
This is cause for concern on two fronts. Firstly, debts of this size leave the UK exposed to unacceptable levels of risk in the event of further financial crises and vulnerable to external forces such as changes to interest rates.
Secondly, this level of debt also burdens the taxpayer. This year, the interest payments on central government debt reached £52.1bn, just over £1bn a week, and are set to reach £75.2bn by 2018/19. Put in plainer terms, the UK government now spends more on servicing its debt than it does on education, more than it spends on public services in Northern Ireland and Wales combined and three times more than Whitehall saved last year in efficiencies. Money that could be used in public services is being diverted into repaying our debts.
Beyond the deficit, government will need to turn its attention to reducing debt and minimising the drain this causes for public spending. It is for the politicians and economists to decide how quickly to cut debt and to what level, but a programme to reduce debt would restrain public sector growth.
What is needed is for policymakers and politicians to do more in terms of thinking about how policy commitments impact on the state’s long-term liabilities. Pledges made today can come back to cause financial headaches years down the line.
A sustained programme to bring down the debt will ensure that, beyond the current years of austerity, there is a stable and more sustainable era of public spending prudence from 2020 onwards.
Mike Turley is vice-chair and UK public sector lead at Deloitte
