Chancellor Rachel Reeves has changed the way the national debt is calculated as part of efforts to balance the accounts in her first budget.
It comes as the country’s national debt has reached £2.7 billion Office for National Statistics – and there are warnings that it could get worse.
This was said by Vitor Gaspar, Director of Fiscal Affairs of the International Monetary Fund Sky News ahead of the budget that the level of the UK’s national debt is “high, rising and risky”.
Subscribe Week
Escape your echo chamber. Get the facts behind the news and analysis from multiple perspectives.
LOG IN AND SAVE
Sign up for free weekly newsletters
Get the best of the Week delivered straight to your inbox, from our morning news briefing to our weekly Good News newsletter.
Get the best of the Week delivered straight to your inbox, from our morning news briefing to our weekly Good News newsletter.
He said public investment was needed to boost growth and prevent borrowing from “increasing significantly above pre-Covid levels”.
What is national debt?
Most government revenue comes from taxes.
Governments can also borrow money from each other and from investors such as pension funds to fill gaps between their income and expenditure. World Economic Forum“because raising taxes is politically difficult”.
They say the government can borrow money BBC newsso it can pay for big projects like new railways and roads to “stimulate the economy”.
National debt is total borrowing that has “accumulated over the years,” the news website added.
The figure gives voters an idea of how much the government is “deferring costs to future taxpayers”, they said Institute of Governmentwhile investors get an idea of whether the government can afford to pay back the money it lends.
How is national debt measured?
There are different ways different countries measure national debt.
The UK measures it against national income or gross domestic product.
According to Office for Budget Responsibilitythe national debt figure will be 98.8% of national income for 2024/25, “equivalent to around £96,000 per household”.
But it could hit more than 270% in the next 50 years, the OBR warned, due to “pressures from an aging population, the climate crisis and security risks”.
Labour’s manifesto pledged that revenue would cover its day-to-day costs, while debt should fall as a share of the economy “by the fifth year of the economic forecast”.
But Reeves made a “technical change in the way we measure debt,” he said MoneyWeek“so that the government can pay for the additional investment”.
She wrote in Financial Times (FT) that the change would “make room for increased investment in the fabric of our economy”.
The change could give the chancellor “room to borrow” an extra £50bn a year by the end of the decade, the FT added, and “debt continues to fall”.
Reeves said ITV News that the investment rule change “will take into account our assets not just the cost of investments”.
What does national debt mean for your finances?
The Chancellor’s pledge that public debt should fall – relative to the size of the UK economy – is a problem for her, said Paul Johnson, director of the Institute for Fiscal Studies The Times.
It will only be able to achieve this by “raising taxes or squeezing spending”, which is why it sought a new measure of debt.
The extra money generated by the new calculation method is expected to go towards construction projects such as roads and railways, MoneyWeek added, but tax increases and spending cuts are still expected.
Higher debt levels may not be good news for everyone.
Former chancellor Jeremy Hunt warned that rising borrowing “could mean interest rates stay higher for longer”.
He said this on the social networking site Xthat it would “punish families with mortgages”.
Gilt money yields – the amount of interest the government pays on its debt based on how risky lenders believe it is – have already risen in recent days and Mr Hunt added that “markets are watching”.