The UK is sitting on its biggest debt pile since WW2. Should you be worried?

UK government borrowing is higher than at any time since the Second World War. But with a strong economic recovery predicted, things might not be as bad as they seem, says Saloni Sardana.

The UK government borrowed an eye-watering £303bn in the year to March as the pandemic created a massive hole in the government’s finances. Government net borrowing now stands at 14.5% of UK GDP. The last time it was anywhere this high was in 1946 when it hit 15.2%, after running up debts to fight the Second World War. The result is that the UK’s public sector net debt, commonly known as the fiscal deficit, is now 97.7% of GDP.  

The furlough scheme and other measures taken to help the economy stay afloat during the pandemic have hit public finances badly. But along with higher spending, the pandemic has also hit tax revenues: the unemployed or furloughed pay lower income tax, and businesses who suffered a slump in profits also pay less in tax. 

Borrowing will continue this year, as many job assistance programmes will continue until at least October, says the BBC’s Faisal Islam. And the government will gain a clearer picture in coming months of the scale of losses on some covid loans to businesses. 

Debt is high – but it’s not all bad news

But it5’s not all bad news. Borrowing, though high, fell short of analysts’ predictions – they had expected UK government spending to hit £400bn this March. That prompted the UK to cut back its plans to sell bonds as it doesn’t need as much cash as it thought it did. The Debt Management Office will now issue £252.6bn of gilts for the year 2021-2022 – £43.4bn less than previously expected. 

And there was positive news from the UK’s retail sales, too, which rose 5.4% in March, even before the country opened its doors to hospitality and reopened shops and outdoor dining on 12 April. 

Why does any of this matter for investors? It signals the UK may have a stronger recovery from the pandemic than the market expects. "If we are right in thinking the economic recovery will be faster and fuller than the OBR anticipates, borrowing will probably fall more quickly than most expect,” says Ruth Gregory, senior economist at Capital Economics. 

Investors should also bear in mind that a stronger economic recovery will boost inflation. That in turn could reduce the value of debt, if wages rise in line with inflation. 

The UK’s debt pile decreased as a percentage of GDP each year between 1947 and 1974 even though  “we only paid back more than we borrowed during seven of those years,” points out the Evening Standard. But given the government is selling more than £40bn fewer gilts next year, this could also put a cap on inflation. 

All this is in theory, of course. Whether that happens in practice will be interesting to see. But a slew of data suggests the UK is poised for strong economic growth. 

Analysts at Capital Economics expect UK GDP to be 3.7% higher than pre-covid levels by the end of 2022. This is higher than European rivals, who suffered a lower contraction last year than the UK economy which slumped by 10% in 2020. 

So for now investors needn’t worry too much about the UK’s debt pile. Expectations of a stronger recovery will boost value stocks that have underperformed in the last decade in favour of growth stocks that are looking increasingly expensive.

Recommended

What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
How rising interest rates could hurt big tech stocks
Tech stocks

How rising interest rates could hurt big tech stocks

Low interest rates have helped the biggest companies to entrench their positions. But what if rates rise?
25 Oct 2021
Get healthy returns from these three healthcare stocks
Share tips

Get healthy returns from these three healthcare stocks

Professional investor Paul Major of the BB Healthcare Trust highlights three of his favourite healthcare stocks.
25 Oct 2021
How much money will you need to comfortably retire on?
Pensions

How much money will you need to comfortably retire on?

New research shows how much you might need to live comfortable life after you stop working.
25 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021