The ‘huge and growing amount of debt’ faced by the UK and what can be done to address it

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Public sector debt is probably the last thing to keep you awake at night these days, but it is growing and will have to be addressed.

When and how are the two big questions.

The UK Government is expected to borrow around £400 billion this financial year to help sustain businesses and jobs – far more than it could have imagined 12 months ago.

Councils in Wales have played a key role in directing business support relief schemes into the bank accounts of local firms which have been forced into hibernation.

Along with the furlough scheme, this Government support is the reason why the once-in-a-century economic downturn hasn’t, for some people, actually felt like one.

But public sector debt at the end of December was £2.13 trillion – virtually the same as all the goods produced and services provided in the UK each year – says Rhys ap Gwilym, senior lecturer in economics at Bangor University.

“The UK Government has a huge, and growing, amount of debt,” he says.

On the plus side, interest rates are currently low so the cost of servicing debt is less compared to the past.

Debt also allows Governments to finance new hospitals, schools, railway projects and the like.

Dr ap Gwilym says debt is useful in another way because a lot of it is held by pension funds, in which most of us have a stake.

“Suffice to say, an economy with no Government debt would be a completely different world to the one which we live in,” he says.

Nevertheless, the UK paid around £48 billion in interest on its debt last year – that’s more than the defence budget.

Two ways of reducing debt are raising taxes and cutting public expenditure – neither a sure-fire vote winner.

The Conservative Government pledged in its 2019 manifesto not to raise the three biggest sources of tax revenue – income tax, national insurance contributions, and VAT.

So when Chancellor Rishi Sunak delivers his Budget on March 3, there will probably be more interest than usual in what he decides to do.

Could the UK Government just not address the extra debt it has taken on?

“Not really,” says Dr ap Gwilym. “If the UK Government reneged on any of its debt, it would face much higher borrowing costs in future – who would lend to an untrustworthy creditor unless the interest rate is very high?

“However, there is no rush to pay off the debt.”

Would another period of austerity, with lower public spending on things like the police and schools, have merit in economic terms?

In a word, no, according to Dr ap Gwilym.

He says austerity failed to meet the two principal economic targets that should have been hit by 2015.

He adds: “Few economists were surprised by this failure.”

Dr ap Gwilym feels there is significant scope for introducing “wealth” taxes.

He says council tax could be changed to better reflect the value of a property.

He says it could be similar to income tax bands, with a tax-free allowance on the first £50,000 of a property for example, then a 1% charge on houses worth £50,000 to £500,000, and 2% above that.

It would mean someone who owns a £100,000 flat paying £500 per year, the owner of a £250,000 house paying £2,000, and the owner of a £1 million house paying £14,500.

“Making it (council tax) more progressive could raise significant tax revenues,” says Dr ap Gwilym.

“This is just an example – lots of other options are possible.”

Prices of assets like property and shares have increased considerably faster over the past 40 years than wage growth, in part due to de-regulation. Low interest rates also help fuel house price growth.

“The initial evidence seems to suggest that Covid will reinforce this trend,” says Dr ap Gwilym.

Another area in which Governments may intervene in the coming years is using the tax system to drive down greenhouse gas emissions.

The UK Government has pledged to become “net zero” by 2050, which means it must continue to drive down emissions and offset remaining emissions by capturing and storing them, or by planting large amounts of trees.

Asked what sort of interventions could help deliver “net zero”, Dr ap Gwilym replies: “Higher taxes on fossil fuels combined with subsidy of energy efficiency measures”.

Isabel Stockton, research economist at the Institute for Fiscal Studies (IFS) – an independent research institute – says the IFS was keen to see a fairer and more efficient tax system.

She says she felt changes to council tax could play its part, with more frequent valuations of properties better reflecting their worth.

She also points to pensions, where she says some money wasn’t taxed “on the way in or the way out” – or when it was then passed on when that pension holder died.

“Do we want pensions to become a vehicle for inheritance?” she says.

Ms Stockton says she couldn’t envisage significant additional tax revenues without a rise in income tax, national insurance contributions or VAT.

She adds that our ageing population will require more public sector spending on health, social care and pensions – around £39 billion extra per decade – to maintain the current provision.

Asked if we were entering an era of ongoing, large public sector debt, she replies: “Definitely. I don’t really see a scenario where the debt returns to pre-pandemic – much less pre-financial crash levels – any time soon.

“Nothing is impossible, but it seems very unlikely.”

MPs may still cheer if the Chancellor cuts duty on beer and wine, and wave their budget papers if he continues with a freeze on fuel duty, but it just feels like public finances have become that much more serious – and will one day face a reckoning.



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