Katie Lam is the MP for the Weald of Kent and a former advisor in Downing Street and the Home Office.
The UK is now spending more than £111 billion a year paying the interest on our national debt. That’s more than double the entire defence budget, nearly double the schools budget, and enough to cover the entire NHS workforce’s salaries, with £30 billion left over.
If it were a government department, it would be the fourth largest in Whitehall; interest payments on our national debt are now higher than at any point in my lifetime.
Of course, borrowing isn’t inherently bad. Just as it’s perfectly reasonable to take out a mortgage to buy a house, it’s sensible for governments to borrow to invest in hospitals, roads, or energy infrastructure, things that will make the country better off in the long run.
What’s not reasonable is racking up debt just to fund day-to-day spending. But that’s exactly what governments have been doing. Public sector net investment as a percentage of government spending has basically remained flat at around four per cent since 2002, but over the same time the size of our debt in proportion to GDP has nearly quadrupled.
That means that the vast majority of this debt surge hasn’t been driven by long-term investments. Instead, it’s been borrowed largely to cover day-to-day spending.
There are situations where spending in this way can be sustainable. If the economy is growing steadily, tax revenues rise naturally and the government can afford to borrow more without having to worry about the country’s finances. Equally, if interest rates are low, the cost of paying down the debt remains manageable, even as the amount of money we owe increases.
But we now live at a time where neither of these are true. We haven’t seen sustained economic growth for most of my lifetime. At the same time, interest rates on government debt are now at the highest level since 2008.
This is exactly the wrong climate to be borrowing. It can’t go on like this. By the end of this Parliament, debt interest payments are set to reach £122 billion. If growth remains sluggish, as much as ten per cent of the budget could be taken up by paying off the interest on our existing debt.
For context, that’s roughly the amount that the government is currently spending on pensions, every year – and that’s assuming that things don’t get worse, which is by no means a given, particularly given this Government’s total inability to cut public spending. As we saw with the Chancellor’s failed welfare cuts, Labour backbenchers just don’t have the appetite to take difficult decisions on the country’s finances. Kemi Badenoch is right: we must live within our means.
If investors start worrying about whether the UK can be trusted to pay them back, or if they think our long-term prospects are weak, they’ll start demanding even higher interest payments to lend to the government.
Britain is now staring down the barrel of a full-blown debt crisis – not unlike what we saw in Greece during the Eurozone crisis, or Italy in the years that followed. That’s how fragile our fiscal position has become.
In its latest Economic and Fiscal Risks report, the OBR warned of “daunting” risks to the public finances, pointing out a “substantial erosion” of the UK’s ability to respond to future shocks.
The reality is that if a fiscal shock, like another pandemic or financial crisis, were to hit the UK, we simply wouldn’t have the capacity to respond – and all the while, we’re spending more and more money, every year, on paying down the debt that we already have, with little long-term investment to show for it.
The country now faces a fundamental choice. We can carry on as we are, continuing to pile on more debt – or we can change course. That means creating the conditions for investment, enterprise and productivity, not stifling them with red tape and regulation. But it also means asking serious questions about what the government can and can’t do.
The state can’t exist to remove all risk from people’s lives, nor should it try to. In the same vein, it can’t provide every possible service, all at the same time. No institution, however well-run, could successfully deliver such a wide range of services to anything like an acceptable quality.
If we want to get Britain growing again, we need to stop assuming that every challenge has a government solution. Until we do this, we condemn ourselves to becoming a stagnation nation, trapped in a vicious cycle, unable to invest, and powerless to build the future the British public deserves.
Katie Lam is the MP for the Weald of Kent and a former advisor in Downing Street and the Home Office.
The UK is now spending more than £111 billion a year paying the interest on our national debt. That’s more than double the entire defence budget, nearly double the schools budget, and enough to cover the entire NHS workforce’s salaries, with £30 billion left over.
If it were a government department, it would be the fourth largest in Whitehall; interest payments on our national debt are now higher than at any point in my lifetime.
Of course, borrowing isn’t inherently bad. Just as it’s perfectly reasonable to take out a mortgage to buy a house, it’s sensible for governments to borrow to invest in hospitals, roads, or energy infrastructure, things that will make the country better off in the long run.
What’s not reasonable is racking up debt just to fund day-to-day spending. But that’s exactly what governments have been doing. Public sector net investment as a percentage of government spending has basically remained flat at around four per cent since 2002, but over the same time the size of our debt in proportion to GDP has nearly quadrupled.
That means that the vast majority of this debt surge hasn’t been driven by long-term investments. Instead, it’s been borrowed largely to cover day-to-day spending.
There are situations where spending in this way can be sustainable. If the economy is growing steadily, tax revenues rise naturally and the government can afford to borrow more without having to worry about the country’s finances. Equally, if interest rates are low, the cost of paying down the debt remains manageable, even as the amount of money we owe increases.
But we now live at a time where neither of these are true. We haven’t seen sustained economic growth for most of my lifetime. At the same time, interest rates on government debt are now at the highest level since 2008.
This is exactly the wrong climate to be borrowing. It can’t go on like this. By the end of this Parliament, debt interest payments are set to reach £122 billion. If growth remains sluggish, as much as ten per cent of the budget could be taken up by paying off the interest on our existing debt.
For context, that’s roughly the amount that the government is currently spending on pensions, every year – and that’s assuming that things don’t get worse, which is by no means a given, particularly given this Government’s total inability to cut public spending. As we saw with the Chancellor’s failed welfare cuts, Labour backbenchers just don’t have the appetite to take difficult decisions on the country’s finances. Kemi Badenoch is right: we must live within our means.
If investors start worrying about whether the UK can be trusted to pay them back, or if they think our long-term prospects are weak, they’ll start demanding even higher interest payments to lend to the government.
Britain is now staring down the barrel of a full-blown debt crisis – not unlike what we saw in Greece during the Eurozone crisis, or Italy in the years that followed. That’s how fragile our fiscal position has become.
In its latest Economic and Fiscal Risks report, the OBR warned of “daunting” risks to the public finances, pointing out a “substantial erosion” of the UK’s ability to respond to future shocks.
The reality is that if a fiscal shock, like another pandemic or financial crisis, were to hit the UK, we simply wouldn’t have the capacity to respond – and all the while, we’re spending more and more money, every year, on paying down the debt that we already have, with little long-term investment to show for it.
The country now faces a fundamental choice. We can carry on as we are, continuing to pile on more debt – or we can change course. That means creating the conditions for investment, enterprise and productivity, not stifling them with red tape and regulation. But it also means asking serious questions about what the government can and can’t do.
The state can’t exist to remove all risk from people’s lives, nor should it try to. In the same vein, it can’t provide every possible service, all at the same time. No institution, however well-run, could successfully deliver such a wide range of services to anything like an acceptable quality.
If we want to get Britain growing again, we need to stop assuming that every challenge has a government solution. Until we do this, we condemn ourselves to becoming a stagnation nation, trapped in a vicious cycle, unable to invest, and powerless to build the future the British public deserves.