Government borrowing has increased dramatically in the past few years. From just under 30% of GDP to just under 60% of GDP in under 3 years is the sharpest peacetime increase in public sector debt burden.
If government debt as a % of GDP rises, then assuming constant interest rates the debt repayments will rise. Public sector debt is forecast to rise from 30% in 2007 to 80% by 2013. This is a very sharp rise in public sector borrowing. This means current and future taxpayers will have to pay more in interest payments over the next few years. In 2008, debt interest payments account for £31billion (2% of GDP). Debt interest in 2013/14 will exceed £51 billion. But, this figure could be higher if borrowing keeps increasing. To put it in perspective £40bn is equal to roughly 25% of all income tax revenue. £40bn is worth 8p on the basic rate of income tax.
Furthermore, if markets become worried over extent of government debt, and the UK's credit rating is reduced, the interest rate and cost of servicing debt is likely to rise even further as a result.
So future tax rises will be partly going towards paying increased debt interest payments.
Also, it is important to bear in mind.
- Public Sector debt has always varied. 30% was a historical low. In the 1970s it was 75%. In the 1950s over 200%.
- The massive national debt of the early 1950s hardly led to a lost generation. The 1950s and 1960s were a period of unparalleled prosperity and rising living standards.
- The rise in the government deficit was essential to avoid a Great Depression Mark II. If the government hadn't bailed out the banks. If the government hadn't tried to increase spending, the fall in confidence and output could have been disastrous. To allow a repeat of the Great Depression would have been the biggest cost to future generations. The borrowing offset the rise in private sector saving and helped a very weak economy recover. It is economic recovery which is the best hope for improving tax revenues and paying off debt.
However, this generation is not unique in running a budget deficit. Historically, we have experienced much worse. This doesn't mean large budget deficits are good. In the medium term, the government needs to tackle the underlying budget deficit. But, the idea of a generation lost because of today's debt, would be a great exaggeration. Just think in 1945, public sector debt was 145%, what did the government do? Savage public spending cuts? No it introduced the national health care service and welfare state. It left office in 1950, with government borrowing over 180% of GDP. Yet, the 50s and 60s witnessed a golden age of economic expansion and rising living standards. So much for the idea of a lost generation....