What is public debt?

Public debt, also known as the ‘national debt’, is the accumulated amounts of borrowing that the government, and other public sector bodies, owe to the private sector and foreign governments.

It has been built up over several centuries as successive governments have borrowed to finance the deficit and meet other cash requirements.

There are various ways of measuring debt, but the UK government prefers to use:

• public sector net debt (PSND or ‘headline debt’), and
• public sector net debt, excluding Bank of England (PSNDexBoE or ‘underlying debt’).

In each case, these are calculated by deducting cash and other liquid financial assets from the gross amounts owed.

Headline debt was equal to £2,694bn on 31 March 2024 (see Chart 1), or just under £2.7tn. This was equivalent to 98.3% of GDP, meaning it is close to the size of the overall UK economy.

Most government borrowing is raised by HM Treasury’s Debt Management Office through the issue of British Government securities to institutional investors at regular auctions.

These financial instruments comprise around:

• £1,650bn of fixed-interest gilts that have an average maturity of around 14 years,
• £610bn or so of retail-price-inflation-index-linked gilts with an average maturity of around 17 years, and
• approximately, £70bn in treasury bills that mature and rollover within six months or less.

Approximately £640bn of the fixed-interest gilts at 31 March 2024 were owned by the Bank of England as part of its quantitative easing (QE) operations to support the economy over the last decade.

The Bank of England owes £930bn to its depositors, of which £640bn is supported by the gilts it owns and £170bn from Term Funding Scheme loan receivables with high street banks, with the balance in the form of an indemnity from HM Treasury for losses on its QE operations.

The government also borrows directly from the public through National Savings & Investments, a government-owned retail bank and savings institution, which owes around £240bn in the form of premium bonds and various types of savings certificates.

Other debt, includes:

• approximately £30bn in loans taken out by Network Rail,
• £15bn in net local government debt (£125bn total debt less £110bn owed to central government), and
• £95bn in other debt from across the public sector.

Overall public sector net debt is equivalent to around £39,000 per person for each of the 69 million people living in the UK in 2024.

How does public debt affect people and businesses?

Public debt attracts interest, which means that there is less available for spending on public services. This was less of an issue when we had ultra-low interest rates, but higher borrowing costs combined with high levels of debt is much more of a problem.

A high level of debt also makes the government more reliant on the goodwill of investors, especially as it must also refinance a substantial amount of existing debt as it matures each year.

For example, the government plans to borrow £277bn in the current financial year (2024/25), comprising £87bn to finance the deficit, £43bn to fund other cash requirements, and £147bn to refinance existing debt.

The resilience of the public finances to potential future economic shocks is also affected by high levels of debt. The UK had plenty of capacity to respond the financial crisis when public sector net debt was less than 40% of GDP before the financial crisis and some capacity when it was less than 80% of GDP before the pandemic and the cost-of-living crisis.

Although the UK could borrow even more, either as a policy choice or in response to a future crisis, so that debt goes above 100% of GDP, this brings with it heightened risks of an adverse market event, as happened following the mini-Budget in October 2022 that led to the resignation of then prime minister Liz Truss.

The challenges in controlling public debt

There are two principal ways to control public debt. The first is to raise taxes or cut spending to reduce the deficit, slowing the rate at which debt increases. (Generating a surplus would allow debt to be repaid, but apart from Germany, prior to the pandemic, few countries have been able to achieve this).

The second is to grow the economy so that GDP rises proportionately faster than the level of debt. This results in a falling debt-to-GDP ratio, which is what government ministers mean when they talk about 'bringing down debt'.

The government’s plan set out in Spring Budget 2024 is to do both – firstly by constraining public spending so that the deficit falls, and secondly through an anticipated economic recovery. The ratio of underlying debt to GDP is still expected to rise for the next four financial years but then start to fall in the fifth year of the forecast period (2028/29). 

What is the outlook for public debt?

The Office for Budget Responsibility has forecast that headline debt will peak at 98.8% of GDP in March 2025 (see Chart 2) and then gradually fall to 94.3% of GDP by March 2029.

However, this trend is flattered by the settlement of £170m Bank of England Term Funding Scheme deposit liabilities over the next three years, as the related loan receivables (not reflected in the headline measure) are recovered.

To adjust for this distortion, the government uses an underlying debt measure that excludes Bank of England balances in its fiscal targets instead and Chart 3 illustrates how this alternative measure is forecast to change between now and March 2029. 

One flaw in the government’s fiscal rule for underlying debt/GDP to start reducing by the fifth year of the forecast period is that it rolls forward each year. In theory, this means governments could indefinitely defer the year that the debt to GDP ratio actually starts to fall.