- Government borrowing has risen to £3.1bn in July 2024 alone
- Politicians have put off dealing with debt for too long
- Taxpayers' cash is being used to repay debt interest rather than on vital public services
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Public sector net debt reached a record £2.5 trillion in 2023-24 and is set to hit an almost unimaginable £3trn by 2028-29, according to the Office for Budget Responsibility. This alarming trend demands attention. While politicians have been keen to play the blame game over the dire state of public finances, none have presented anything close to a solution. In the 2024 general election, both parties pledged yet more spending on public services while promising not to raise major taxes, engaging in what the Institute for Fiscal Studies labelled a ‘conspiracy of silence’ as to how their commitments were going to be paid for.
Politicians can’t evade fiscal reality indefinitely. The colossal public sector debt has tangible consequences, with one of the most significant being the annual debt repayment. In 2023-24, central government debt interest stood at a staggering £102.2 billion, more than two and a half times the figure a decade ago. To put this in perspective, it’s 1.5 times the Ministry of Defence’s planned expenditure for the same year. If debt interest were a government department, it would be the fifth largest by cost, equivalent to over half of the health and social care budget.
Today, the Office for National Statistics has released updated public sector finance data, the first time it’s done so since the Chancellor publicly laid out the state of the public finances. So, what is the lay of the land now?
Borrowing has risen to £3.1bn in July 2024 alone, up by £1.8bn from July 2023 – the highest level in three years. Why is this? According to the ONS, ‘the cost of public services and benefits continued to rise’. So for all of Reeves’ bold rhetoric about sorting out the public finances, her decision to hand out public sector pay rises like candy has now exacerbated an already desperate situation.
This will only drive up the national debt further. Excluding the Bank of England, debt is now 91.9% of GDP, almost five percentage points more than at the end of July 2023. The Taxpayers’ Alliance’s debt clock shows that the debt is already rising by £4,410 per second, and this looks likely to accelerate. Just a few weeks ago, Rachel Reeves said, ‘if we cannot afford it, we cannot do it’. We cannot afford it. But she did it anyway.
Is there a way Reeves could have afforded these public sector pay hikes? Given the current situation, almost certainly not. But imagine if that £102.2bn in debt interest payments was available. Every pound spent on debt interest is one pound less that can be spent on its priorities. And while the ONS figures do show that debt interest payments have fallen, this is no reason to relax. The spending decisions made today will impact the room to manoeuvre of governments tomorrow.
To give a brief overview of what debt interest could pay for. For those on the pro-spending side of the argument, debt interest in 2023-24 could pay for all of the following policies: 495,000 new homes, the £28bn green prosperity plan, renationalising water companies, scrapping undergraduate tuition fees, a 5.5% pay rise for all public sector workers, free personal adult and social care, and eliminating the two child benefit cap. Many of these may be terrible policies, but surely the public would prefer to have this money available to spend on their priorities rather than just covering debt?
For those on the pro-tax cuts side, debt interest in 2023-24 was equivalent to abolishing the national insurance main rate for employees, abolishing council tax, unfreezing the personal allowance and higher rate thresholds for income tax and a 2p cut in the basic rate of income tax. Or, it’s equal to abolishing fuel duties, capital gains tax, stamp duty, alcohol duty, tobacco duty, insurance premium tax, inheritance tax, the apprenticeship levy, climate change levy, sugar tax and the plastic packaging tax. Again, surely preferable to debt interest.
Like her predecessor, the Chancellor has committed to bringing down debt as a percentage of GDP in five years as a ‘non-negotiable’ fiscal rule. Yet, as some have argued – and as history demonstrates – this allows politicians to kick the can down the road, promising future cuts they don’t intend to deliver while spending wildly in the present. The Conservatives, for example, only met the fiscal rule on the assumption that fuel duties would be unfrozen, despite it being frozen every year since 2011-12. If things continue on their current trajectory, we will see an ever-increasing amount of taxpayers’ money being spent on debt interest payments instead of essential public services or tax cuts.
The Government has an opportunity to do something different and recognise that if it wants to implement its plans tomorrow, tough choices must be made on spending today. This means ensuring spending is focused on bringing down debt rather than making more spending commitments the nation cannot afford.
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