The United Kingdom has placed higher than Sierra Leone, Egypt and Mozambique in a table of countries with the highest amount of debt as a ratio of gross domestic product (GDP).
With an estimated GDP of £3 trillion, the UK is said to have a debt totalling 106 percent of this amount making it the 15th placed country in the debt to ratio table.
Global debt has fallen in the years since the pandemic as fiscal support measures were withdrawn in its wake as well as the rebound in economic activity, inflation surprises, and interest rate hikes.
Despite this global trend, the UK’s debt has risen in recent years, with estimates by the Office for Budget Responsibility (OBR) estimating that it will continue to rise over the next four years.
The UK is not the only leading economy inside the top 20 with France placing eleventh, the United States sixth and Japan coming out on top with an eye watering 252 percent.
Whilst the word ‘debt’ is often enough to send most people into a varying states of anxiety, when talking in terms of large economies, debt can often be a positive rather than a negative.
Why do governments borrow?
The majority of a government’s income comes from taxes and while it can sometimes live within its means, doing so can often have an adverse effect as it prevents it from investing in areas that it needs to.
When it needs to spend more than it receives in tax it has two options.
It can raise taxes which is not only often unpopular but can have the effect of reducing the amount of disposable income which in turn reduces the amount of profit business make and ultimately the amount of tax they pay.
The second option is to borrow money, usually to reinvest in large projects such as roads, rail or infrastructure which over a longer period of time, it would hope to generate more than enough to cover the cost of borrowing.
How do governments borrow money?
Governments borrow money by selling bonds – a financial product which is essentially a promise to repay the money at a future date, with regular interest payments paid along the way.
From large economies such as the US and UK, these are often considered extremely low risk as the odds of the government being unable to repay the loan are almost zero.
For less stable economies, the risk of the government being unable to repay the loan is greater but this is often offset by higher rates of interest being paid across the duration of the loan.
What are the risks?
The rate at which borrowing becomes too much is difficult to agree on and the source of much debate.
Some economists argue that the UK is already borrowing too much while others argue that borrowing is crucial to allow the government to invest in projects that will drive the UK’s economy for a generation.
But the OBR warns that debt could sore in the coming years, as an aging population continues to grow.
For countries with ageing populations such as the UK and debt leaders Japan, the amount of people relying on the state for things such as care increases whilst the amount of people of working age decreases.
This has an impact on government expenditure as it spends more on caring for its elderly whilst its income through taxes decreases.