- Most of the UK government’s debt is owed to itself and people in the UK, but the private sector’s debt is escalating.
For over thirty years financial deregulation has created a huge financial sector in the UK economy, and consequently a gigantic private sector debt. This process has been part of a continuing increase in inequality. Deregulation in the 1980s led to a bust in 1989. But the banking sector returned to borrowing large amounts from overseas during the long boom of the late 1990s and 2000s, when incomes of the richest 2% rose dramatically faster than everyone else’s. This banking borrowing and lending binge helped create the global financial crisis of 2008, crashing the UK economy. Today, the UK government’s debt remains mainly owed to itself and people in the UK, with a low external debt. However, the UK as a whole, public and private sectors, has a large deficit with the rest of the world, and private sector debt is large and growing.
After the oil price spikes and inflation of the 1970s, the UK deregulated financial services, alongside widespread privatisation and liberalisation of the economy. In 1979 all regulations on the movement of money across the UK’s borders were removed, and in 1986 many regulations on the financial sector were removed, known as the ‘Big Bang’, allowing greater lending and risk taking.
The changes in 1986 led to a large inflow of loans and capital into the banking sector and country, helping fuel a boom in house prices, which bust in 1989. The ensuing recession ended when speculators forced the pound out of the European exchange rate mechanism, the forerunner of the Euro, in 1992. Devaluation helped the economy to recover. Throughout this time, there were big increases in inequality, with the richest 20% seeing their incomes rise three times faster than the poorest 20%.
A longer and bigger boom began from the late-1990s, again fuelled by large inflows of loans and capital, especially to the banking sector. Inequality remained high and, whilst it did not increase at the same rate as in the 1980s and 1990s, there continued to be much faster growth in income for the richest 2%. The inflow of foreign capital also pushed the UK’s currency higher, making it more difficult for other industries such as manufacturing.
By 2004, the foreign owed debt of the private sector was over 250% of GDP, and it kept increasing to 440% by the start of 2008 (foreign debts were also owed to UK banks). In contrast, the foreign owed debt of the government was just 7% of GDP in 2004, increasing to 15% by 2008.
In 2008, the long boom bust, when banks began to accept they would not get back significant amounts of the money they had lent; both overseas and in the UK. The global financial crisis also reduced the amount of new loans to British banks, contributing to the recession. The banks were bust and the government bailed them out by taking on more debt itself.
The UK government’s debt increased from 38% of GDP in 2007 to 83% by 2012, caused by the economic collapse, bank bailouts, fall in tax revenues and increase in welfare payments. As banks stopped lending new money, and people and companies rushed to pay off their debts, the government effectively stepped-in to prevent the crisis being even worse.
However, as of end-2016 the UK government’s total debt owed outside the country is still only 20% of GDP, the lowest of any G7 country. A similar amount is owed to the UK government itself – the Bank of England – after the central bank printed £375 billion to buy UK government debt (known as quantitative easing). The UK government can borrow at the lowest interest rates in its history, and in 2015 and 2016 government interest payments, as a percentage of GDP, reached virtually the lowest since figures began.
In contrast, the debt owed by the UK’s private sector continues to be high, and is growing. The total debt of the UK’s private sector debt is estimated to be over 400% of GDP, more than four times the size of UK government debt. As of 2017, debt owed by individuals (also known as household debt) is increasing at the fastest rate since the build-up to the financial crisis. Moreover, the Office for Budget Responsibility forecasts it will continue to increase. Unsecured lending (also known as consumer credit) has been growing particularly rapidly. The annual growth rate was 9.8% in the year to July 2017.
Finally, the UK economy as a whole (public and private sectors) has the largest deficit with the rest of the world of any rich country. The current account balance measures how much the UK (the public and private sector) is sending to the rest of the world each year through buying imports and making debt and profit payments, and how much it is earning through exports and receiving debt and profit payments. It is the true measure of whether the UK is ‘living within its means’. Any deficit comes from borrowing from the rest of the world or selling things people in the UK own, to people outside the UK. In 2016, the UK had a current account deficit of 4.4% of GDP. According to the IMF, this is the highest of any rich country.