Key Takeaways
Public-sector borrowing and debt
The UK public finances are generally reported on the level of the public sector excluding public-sector banks. This covers central and local government, public corporations, funded public-sector pensions and the Bank of England.
Public-sector net borrowing excluding public-sector banks (PSNB ex) amounted to £119.1bn in the first three quarters of the 2023-24 financial year (FY), the fourth highest on record for that period. In the second half of the last decade PSNB ex was generally around half as high in the respective periods.
PSNB ex for the full FY 2022-23 amounted to £130.1bn, equivalent to 5.1% of GDP, marginally lower than in 2021-22 but significantly smaller than the 15% recorded in 2020-21 as a result of the Covid pandemic. The share is also lower than in any FY between 2008-09 and 2013-14.
Central government is historically responsible for most of the public-sector net borrowing. In 2022-23 central government and local government borrowed £127.8bn and £10.7bn respectively on a net basis, with non-financial public corporations and funded public-sector pensions reporting small surpluses. In previous years the Bank of England also recorded small surpluses. Transfers between the sub-sectors are netted out of the statistics.
The UK government’s preferred measure of debt is on a net basis excluding public-sector banks (PSND ex). In December 2023 PSND ex stood at 97.7% of GDP, a level last seen in the early 1960s. PSND ex increased from ~35% of GDP at the end of 2007-08 to ~85% of GDP mid last decade because of the financial crisis. It jumped to nearly 100% of GDP in 2020-21 as a result of the Covid pandemic.
International public finance comparisons are commonly made on a general government gross basis. As a share of GDP, UK gross general government debt was lower in 2022 (at 101.9%) than in France (at 111.1%), the United States (at 121.3%) but higher than in Germany (at 66.1%). The G7 average was 128%, much of it reflecting Japan’s high debt level (at 260.1% of GDP).
Fiscal plans and targets
The government announced in its 2023 Autumn Statement to reduce public-sector net borrowing from an estimated ~4.5% of GDP in 2023-24 to below 2% of GDP by 2027-28 so that net debt could start falling as a share of GDP within the next five years – one of the government’s fiscal targets. In 2023-24 social protection and health spending should make up nearly half of total managed expenditure, while debt interest payments account for around 10% – only marginally less than education spending.
Fiscal sustainability
The Office for Budget Responsibility (OBR), the UK’s official independent fiscal watchdog, regularly assesses the long-term sustainability of the UK public finances. The OBR projects the PSND ex to GDP ratio to fall slightly over coming years but then to increase sharply over coming decades as a result of population ageing. In the OBR’s baseline scenario PSND ex reaches 150% of GDP by mid-century and more than 300% by the early 2070s. According to the OBR, this is probably an underestimate as many potential risks are not considered in the baseline. For example, reasonably assuming that debt interest rates rise as the government becomes more indebted could take PSND ex to around 375% of GDP by the early 2070s.
Why does it matter?
The UK public finances are a crucial part of the economic and financial environment within which local authorities operate. Fiscal pressures are on the increase at all levels of government, while raising sufficient revenue remains challenging. Local authorities will need to learn to operate within tight fiscal constraints for years to come, making it ever more important to prioritise and seek efficiency gains.
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