A quickie on the UK debt-to-GDP ratio…

Remember all the fuss last year when it was reported that the UK’s public debt-to-GDP ratio had hit 100%? This happened in the May data and again in July, but in both cases the figures were later revised down. In January 2021, net debt was still ‘only’ 97.9% of GDP.

This is mainly because the ‘GDP’ in ‘debt-to-GDP’, which is partly based on OBR projections, has not fallen by as much as expected. For example, the OBR had assumed (perfectly reasonably) that GDP would decline in the final quarter of last year as a result of the second national lockdown. In the event, it managed a small increase.

As it happens, monthly borrowing has consistently been lower than the official projections too. Borrowing in the ten months to January was £69.2 billion lower than the OBR had estimated in November, and the OBR’s own commentary on the January data was headlined “Sharp rise in budget deficit is slower than expected” (though you had look hard to find that in most media reports!).

Of course, 97.9% is still an uncomfortably high number, and it is likely to rise further (£20 billion of additional borrowing is about 1% of GDP). But it has been even higher in the past. The UK debt-to-GDP ratio is also still lower than in many other major economies (the chart below shows late 2020 forecasts from the OBR and IMF).

What’s more, some of the additional UK ‘debt’ reflects quirks in the ways in which the Bank of England’s asset purchases and loans are accounted for. (These are explained in more detail by the ONS here.) If these ‘temporary effects’ are excluded, ‘debt’ falls from 97.9% to 87.3% (though the true picture probably lies somewhere in between).

This may all seem a bit nerdy, but there are three main points to take away.

First, the public finances are notoriously difficult to forecast and even the past is uncertain! I would be wary of anyone who claims with confidence that Covid will leave a ‘black hole’ of £X billion in the public finances.

Second, don’t obsess about whether debt is a few percentages points above, or below, 100% of GDP. Even without the measurement issues, there is no particular threshold at which debt becomes a problem – it all depends on economic and market conditions. (Similarly, if interest rates do rise, the implications depend on what’s driving the increase. It would presumably be some combination of stronger economic growth and higher inflation – both probably helpful in reducing the debt-to-GDP ratio.)

Third, the slower-than-expected increases in both government borrowing and the debt-to-GDP ratio are yet another reason not to rush to raise taxes (or any other form of austerity). Indeed, if GDP recovers as quickly as I hope (and expect), tax rises may not be needed at all.

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