The British public debt is the money borrowed by the Government of the United Kingdom at any one time through the issue of securities by the British Treasury and other government agencies.
As of July 2011 the national debt amounted to £940.1 billion, or 61.4% of total GDP. The annual cost of servicing the public debt amounts to around £43bn, or roughly 3% of GDP. This is roughly the same size as the British defence budget.
Due to the Government's significant budget deficit, which must be financed by borrowing, the national debt is increasing by approximately £121 billion per annum, or around £2.3 billion each week.
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The public debt increases or decreases as a result of the annual budget deficit or surplus. The British Government budget deficit or surplus is the cash difference between government receipts and spending, ignoring intra-governmental transfers. The British Government debt is rising due to a gap between revenue and expenditure. Total government revenue in the fiscal year 2011/12 is projected to be £589 billion, whereas total expenditure is estimated at £710 billion. Therefore the total deficit, which must be financed by borrowing, is £121 billion. This represents borrowing of a little over £2 billion per week.
The British Government finances its debt by issuing Gilts, or Government securities. These securities are the simplest form of government bond and make up the largest share of British Government debt.[1] A conventional gilt is a bond issued by the British Government which pays the holder a fixed cash payment (or coupon) every six months until maturity, at which point the holder receives their final coupon payment and the return of the principal.
In addition to new borrowing, the Government must service the cost of the existing debt. The cost of the British National debt is measured by the interest that the government must pay on the bonds and gilts it sells to investors. The annual cost of servicing the public debt amounts to around £43bn, or roughly 3% of GDP. This is roughly the same size as the British defence budget.[2]
The British population stands at around 59 million people, and the debt therefore amounts to a little over £15,000 for each individual Briton, or around £33,000 per person in employment. Every household in Britain pays in taxes around £2,000 per annum to finance the interest.[3]
However, by international standards Britain enjoys very low borrowing costs, perhaps because, like the United States, the British Government has never failed to repay its creditors.[3]
All the main political parties in Britain agree that the debt is too high, but there is disagreement as to the remedy. Forecasts suggest that the national debt could rise towards 100% of GDP by 2012, far above the government’s sustainable investment rule of a national debt no greater than 40% of GDP.[2]
The size of the debt can be reduced in several ways:
Unfortunately, large scale cuts in public spending have the potential to significantly dampen consumer demand and, by reducing economic growth, slow the increase in tax revenues.[2]
In Parliament, there continues to be disagreement between the political parties regarding the national debt, with Conservative Party politicians typically advocating a larger role for cuts to public spending, while the Labour Party tend to advocate fewer cuts and more emphasis on economic expansion.
The origins of the British national debt can be found during the reign of William III, who engaged a syndicate of City traders and merchants to offer for sale an issue of government debt. This syndicate soon evolved into the Bank of England, eventually financing the wars of the Duke of Marlborough and later Imperial conquests.
The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to the plan which had been proposed by William Paterson three years before, but had not been acted upon.[4] He proposed a loan of £1.2m to the government; in return the subscribers would be incorporated as The Governor and Company of the Bank of England with long-term banking privileges including the issue of notes. The Royal Charter was granted on 27 July through the passage of the Tonnage Act of 1694.[5]
Public finances were in so dire a condition at the time that the terms of the loan were that it was to be serviced at a rate of 8% per annum, and there was also a service charge of £4000 per annum for the management of the loan. The first governor was Sir John Houblon, who is depicted in the £50 note issued in 1994. The charter was renewed in 1742, 1764, and 1781.
In 1815, at the end of the Napoleonic Wars, British government debt reached a peak of more than 200% of GDP.[6]
At the beginning of the 20th century the national debt stood at around 30 percent of GDP.[6] However, during World War I the British Government was forced to borrow heavily in order to finance the war effort. The national debt increased from £650m in 1914 to £7.4 billion in 1919.[3]
Britain borrowed heavily from the USA during World War I, and many loans from this period remain in a curious state of limbo. In 1934, during a time of economic crisis, Britain still owed the USA $4.4bn of WWI debt (about £866m at 1934 exchange rates). Adjusted for inflation, that would amount to around £40bn today, and if adjusted by the growth of British GDP, to about £225 billion. During the Great Depression Britain effectively ceased payments on these loans, which have never been formally written off. In 1931, President Herbert Hoover announced a one-year moratorium on war loan repayments from all nations. [7]
During World War II the Government was again forced to borrow heavily in order to finance war with the Axis powers. By the end of the conflict Britain's debt exceeded 200 percent of GDP, as it had done after the end of the Napoleonic Wars.[6] Once again the USA provided the major source of funds, this time via low interest loans and also through the Lend Lease Act. Even at the end of the war Britain needed American financial assistance, and in 1945 Britain took a loan for $586 million (about £145 million at 1945 exchange rates), and in addition a further $3,750 million line of credit (about £930m at 1945 exchange rates). The debt was to be paid off in 50 annual repayments commencing in 1950. Some of these loans have only recently been paid off. On 31 December 2006, Britain made a final payment of about $83m (£45.5m) and thereby discharged the last of its war loans from the USA. [8]
After the war the debt gradually fell as a proportion of GDP, but in 1976 the British Government led by James Callaghan faced a Sterling crisis during which the value of the pound tumbled and the government found it difficult to raise sufficient funds to maintain its spending commitments. The Prime Minister was forced to apply to the International Monetary Fund for a £2.3 billion rescue package; the largest-ever call on IMF resources up to that point.[9] In November 1976 the IMF announced its conditions for a loan, including deep cuts in public expenditure, in effect taking control of UK domestic policy.[10] The crisis was seen as a national humiliation, with Callaghan being forced to go "cap in hand" to the IMF.[11]
In the late 1990s and early 2000s the national debt dropped in relative terms, falling to 29% of GDP by 2002. After that it began to increase, despite sustained economic growth, increasing to 37% of GDP in 2007. This was due to extra government borrowing, largely caused by increased spending on health, education, and social security benefits.[2] Since 2008, when the British economy slowed sharply and fell into recession, the national debt has risen dramatically, mainly caused by increased spending on welfare benefits, bank bailouts, and a significant drop in receipts from stamp duty and income tax. [2]
In the 20 year period from 1986/87 to 2006/07 government spending in the United Kingdom averaged around 40 per cent of GDP.[12] As a result of the 2007-2010 financial crisis and the late-2000s global recession government spending increased to a historically high level of 48 per cent of GDP in 2009-10, partly as a result of the cost of a series of bank bailouts.[12][13] In July 2007, Britain had government debt at 35.5% of GDP.[13] This figure rose to 56.8% of GDP by July 2009.[14] As of June 2010 there were approximately 6,051,000 public sector employees in Britain (compared to approximately 23,107,000 private sector employees).[15]
Official figures state that as of July 2011 the British national debt amounted to £940.1 billion, or 61.4% of total GDP.[2] The annual amount that the government must borrow to plug the gap in its finances used to be known as the Public sector borrowing requirement, but is now called the public sector net cash requirement (PSNCR). The PSNCR figure for 2010/11 was £143.2 billion, or 11.7% of GDP.[2] Total British GDP in 2010/11 was estimated by the IMF at $2.25 trillion, or around £1.4 trillon.[16]
By historic peacetime standards, the national debt is large and growing rapidly, but it is currently nowhere near its peak after WW2 when it reached over 180% of GDP.[2]
The Institute of Economic Affairs estimated the current British national debt, once including state & public pensions, as well as other commitments by the government, to be near £5 trillion, compared with the Government's estimate of £845 billion (as of 17/11/2010)[17] Other estimates put the national debt at around £900 billion.[3]
The British Government's debt is owned by a wide variety of investors, most notably pension funds. At present around 35% of the national debt is owed to overseas governments and investors.[3]
Britain's volume of debt is ranked 23rd internationally according the CIA World Factbook. Many other countries have larger debt burdens. For example, Japan has a National debt of around 194% of GDP, whilst that of Italy is more than 100%. The US national debt reached 100% of GDP in November 2011.[2]
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