So why does public debt matter

28 July, 2011


A lot has been written recently regarding the public debit and all the news surrounding Alistair Darling’s second Budget, but why does public debt matter?

What is GDP and why is it significant?
Gross domestic product is, in effect, the income a country generates. As with individuals, you have to consider what is a sensible level of borrowing you can take out against the income you produce. The numbers now, in terms of borrowing levels, are increasing significantly – and in a relatively short period.

What is meant by net public debt and how will Britain’s change?
Net public debt is the amount a country has built up during years of borrowing. The chancellor is now forecasting that public debt will rise to close to 80 per cent of GDP by 2013-2014 – that’s roughly £1.4trillion, or £23,000 a person.

And how will we all be affected?
Ultimately, that debt has to be borrowed from international sources and will need to be paid back. As individuals, we will all pay for the borrowing in one way or another, through higher taxes or reduced spending.

Historically, how does this compare?
The level of net public debt is the highest since the 1950s, when we were paying off the cost of World War II. That’s a pretty high level of borrowing, seeing as its closest comparison is when we were emerging from a war. Back then, net public debit was 250 percent of GDP.

Will Britain’s credit rating be harmed?
The new figure is almost twice the previous public debt ceiling of 40 per cent of GDP. It raises the risk the bond markets will eventually push up the cost of government debt in response. Not only are we borrowing billions, but the cost of servicing the debt could well rise.

What will happen to exchange rates?
High public debt causes confidence in the UK economy to fall. Therefore sterling assets are less in demand and the value of the Pound can fall. This was demonstrated after the budget speech itself, when Euro exchange rates and GBPUSD both fell over 1%. Until confidence returns to the UK economy, there is unlikely to be much upward movement for sterling.