Page last updated at 00:18 GMT, Tuesday, 22 December 2009

Is UK government debt really that high?

By Richard Anderson
Business reporter, BBC News

HM Treasury building
UK government debt levels have risen by more than a half in the past two years

This year, the UK government's debt as a percentage of its overall economic output will hit almost 70%, according to the International Monetary Fund (IMF).

No wonder leading credit ratings agencies have expressed concern and suggested the UK's AAA rating - reserved for only the very safest borrowers - is under threat, sparking widespread hysteria in the media that UK debt is spiralling out of control.

Reading some headlines, you might even be forgiven for thinking UK plc is on the verge of going bust.

But are the UK's debt levels really that bad when compared with other leading developed economies?

The chart below will tell you that, in fact, the UK has the lowest level of debt of all the leading developed economies of the world. Its 68.7% of GDP compares favourably with the US (84.8%), Italy (115.8%) and Japan (218.6%) in particular.

G7 government debt levels

"When you look at other countries' debt, it is unfair [to pick out the UK]," says Vicky Redwood, UK economist at Capital Economics.

'Debt burden'

The problem, she says, is the degree to which the debt has deteriorated. In 2007, before the financial crisis, the UK's debt stood at just 44.1% of GDP, according to the IMF. That's a rise of more than a half in just two years.

And, according to most projections, it is set to go an awful lot higher.

According to Standard & Poor's (S&P) credit rating agency, the government's support for the financial sector could result in debt levels hitting almost 100% of GDP by 2013.

The credit ratings agencies are very concerned, but I think [this concern] is misplaced
Gerard Lyons, chief economist, Standard Chartered

"A government debt burden of that level, if sustained, would, in S&P's view, be incompatible with a AAA rating," the agency has said.

In fact, S&P has already taken action against the UK. In May this year, it downgraded its view of the UK to "AAA negative" from "AAA stable" for the first time since it started analysing the UK's public finances in 1978.

It has not downgraded any other G7 economy this year, or last year for that matter.

Another leading agency, Moody's, has also warned that if the UK does not sort out its debt levels by 2013, it could face losing its AAA rating. The agency has also issued a similar warning about the US.

So, the concern is not so much over current debt levels, but future debt levels.

But again, is the outlook for the UK's debt position much worse than that of other major economies?

"It is hard to single out the UK," says Gilles Moec, senior European economist at Deutsche Bank. "In 2011, the UK and the eurozone are projected to have exactly the same debt to GDP ratio."

In fact, according to the IMF, the UK's debt levels as a percentage of its economic output will be 98.3% in 2014, lower than the US (108.2%), Italy (128.5%) and Japan (245.6%), and only fractionally higher than France (96.3%).

Repaying these high levels of debt will force countries to cut spending and raise taxes, with potentially serious implications for their inhabitants.

But it's hard to avoid the conclusion that the UK is being penalised simply for having a low level of debt in the first place.

'Action plan'

"The credit ratings agencies are very concerned, but I think [this concern] is misplaced," says Gerard Lyons, chief economist at Standard Chartered.

"They are right to be worried, but [debt levels] need to kept in context. Market sentiment has moved from one extreme to the other... UK debt levels are not excessively high."

The problem specific to the UK, then, is not the level of debt itself. Nor necessarily the government's ability to repay it.

Chancellor of the Exchequer Alistair Darling
The government has not laid out clear plans to reduce debt, analysts say

What really concerns markets is a perceived lack of determination on behalf of the government to do so.

"Markets like to see measures laid out in a clear plan of action," says Stuart Green, global economist at HSBC.

And while others have laid out more detailed plans about how to reduce their debt levels, the UK has been rather vague.

"The government hasn't done enough to reassure markets, not as much as other countries," says Vicky Redwood.

It has promised to halve its annual budget deficit within the next four years, but this means the overall level of debt is still rising.

More worrying to investors is the fact that government spending will not be curtailed in the short term, as the Treasury is desperate to stimulate the economy during the recession.

This is less of an issue for other major economies that, unlike the UK, are all now growing again following the downturn.

'Foreign ownership'

Securing economic growth is vital, as this is the key to repaying debt. As Mr Lyons says, "Growth is the real solution."

But while the UK may still be mired in recession, most commentators expect figures for the final three months of this year to show a return to growth.

Nor has there been a major loss of confidence in UK debt, sold as gilts, by overseas investors. At least, not yet.

"The share of foreign ownership [of gilts] has not declined significantly," says Mr Green.

This confidence will be key when the government stops buying its own debt through its quantitative easing programme next year.

So while debt levels remain in line with those in other major economies, while investors keep buying gilts, and as long as the UK economy recovers as most expect it to, there seems little reason to panic.

Large debts are bad for any country, as they inhibit government spending and economic growth.

"Thirty years of economic history tells us that, in the end, fiscal profligacy has to paid for," says Mr Moec.

Paying interest on high debts is like "paying a tax on your current income. Very high debts to GDP come with shallow trend [economic] growth. There is no way round this," he says.

And in the end, it is the taxpayers that will suffer.

But, as the IMF figures and projections show, all major developed economies suffer from high debts.

The UK is, for now at least, no worse off than the rest of them.



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