The recent media campaign by the Conservatives has sought to portray Labour, and in particular Gordon Brown, as acting recklessly in increasing the national debt, with negative implications for ordinary citizens. The campaign uses an image of a new-born baby above the slogan:

“Dad’s nose. Mum’s eyes. Gordon Brown’s debt. Labour’s Debt Crisis: every child in Britain is born owing £17,000.”

Is the problem of debt in the UK merely the result of the country’s current economic circumstances or does it go deeper? There is an argument to say that debt has become imbedded in our culture at a much more insidious level, making the Tory’s use of a new-born infant particularly appropriate.

We are a generation brought up on easy access to credit. An obvious example of this is the idea of student loans whereby students are actively encouraged to take on substantial levels of debt at a young age without being educated on the implications of this debt or on how to repay it. The same goes for credit cards and ‘interest free’ overdrafts which are actively marketed to young people by high street banks and have subsequently become the must have of any young person in the UK today.

Student Debt

Our nonchalant national attitude to debt is clearly demonstrated by today’s student community. According to recent statistics, the amount of debt accumulated by students during the course of their university studies has been rising year-on-year since the Conservative government froze the value of student grants and introduced the student loan scheme in the early 1990s. Following its inauguration, the Labour Party soon went one step further in 1997 in abolishing grants altogether and introducing compulsory tuition fees for all university students. The recently introduced ‘top-up fees’ have only added to the burden heaped upon the UK’s students as they struggle to fund their way through education and have therefore become increasingly more reliant on the loan system.

By current estimates, students who started university in the UK in 2007 can expect to owe more than £17,500 by the time they leave, possibly more if they are forced to repeat a year.It is also suggested that the average debt for a student currently in full-time university education tops £4,500 for each year of study - nearly 10% more than 2007 levels. With some students taking up to five years to graduate this soon adds up.

And this is not the end of the matter, with there being a strong possibility that the cost of financing a university education will increase substantially over the next few years.

Consumer Debt

The most severe example of our attitude to debt is perhaps to be found in the consumer sector. Overspending by the average consumer is in large part responsible for the current economic malaise. The cheap credit available to average UK households in the form of mortgages and other forms of loans such as credit cards and bank loans allowed people to borrow far beyond their means. This created a housing bubble which in turn forced people to borrow more and to overstretch themselves. Household debt – much of it based on mortgages – rose rapidly during the period of economic prosperity which roughly tracked Tony Blair’s premiership: from 65 % of UK GDP in 1997 to over 100 % in 2007.

It is argued from several quarters that this easy access to debt enjoyed by consumers was actively encouraged by the government. High levels of consumer spending fuelled the economic boom which kept Britain prosperous and in turn kept Labour in government. All this changed, however, as the bursting of the credit bubble in the US in late 2007 began to have a knock-on effect for the massively over-leveraged state of households in the UK. 

As mentioned, much of this debt was accumulated in the housing sector. We have all heard the stories of 110% mortgages, not to mention the sub-prime mortgages issued to individuals in the US who were never likely to be able to keep up with payments, some of them not even being employed. The reaction to this has been a huge withdrawal of credit to ordinary consumers over the past few months. This has had disastrous consequences for estate agents, property firms and other industries which are used to relying heavily on consumer credit – such as the car industry. Now, as consumer spending and business confidence has fallen away dramatically over the last few months, the government is desperately trying to re-establish credit lines through loaning money to the banks, slashing interest rates and even cutting VAT levels.

National Debt 

The boom years of the British economy were coupled with a period of immense public spending as Labour invested unprecedented amounts in public services such as healthcare, social services and education. All this spending took place whilst keeping total expenditure below the government’s ‘ceiling’ of 40% of GDP, aided by a healthy economy, a strong financial services sector and a low budget deficit. Yet this spending still had an incremental effect on the UK’s level of national debt which rose from 30% in 2002 to 37 % in 2007. This rate of increase has escalated further since the onset of the financial crisis which has seen the government acquire the ‘toxic’ assets of failing institutions like Northern Rock and Bradford and Bingley as well as taking on debt from the Uk’s banks as part of its bailout scheme.  Following these initiatives, the level of national debt in the UK currently stands at 47.5% of GDP. Though this appears an alarmingly high figure, it is still relatively low when compared to most developed countries. The UK is officially the 50th most indebted country in the world, behind the majority of its closest economic competitors (France, Germany and Italy) as well as the US and Japan.

Nevertheless, the current level is significantly above the ‘ceiling’ of 40% of GDP as outlined by the then Chancellor, Gordon Brown, following the election of the Labour Party in 1997. Worryingly, this number is only set to increase further as the government’s bailout of the banking sector and its fiscal spending plan comes into effect over the next few years. European Union officials in Brussels expect the UK’s national debt to swell from its current level to £1.06 trillion, or 72 per cent of GDP, by 2010. An economic think tank, The Institute for Fiscal Studies, estimates that it will take until 2030 for the UK’s debt to fall back below its 40% target mark. To put the figure it into context, 60% of GDP is the maximum debt allowed by countries wishing to join the European Monetary Union. At over 70%, the likelihood is that by 2010 the UK wouldn’t be allowed to join even if it wanted to.

Mixed messages

The Conservative party has been unabashed in its criticism of the increased debt levels, citing that, as Chancellor, Gordon Brown borrowed irresponsibly during the growth years of the British economy without factoring in the possibility of an economic downturn.

Former Conservative Prime Minister, Sir John Major was recently quoted as saying:

“If we continue borrowing like this we will have a huge amount of borrowing that will force up interest rates. In three years’ time, as the world comes out of recession, in the United Kingdom we will have higher interest rates, we will have higher national insurance contributions because the government have already implemented that, and we will have higher taxes.”

Meanwhile, the Labour Party has denied that its increased borrowing is reckless or that it was reaching an unsustainable level of national debt. When challenged in Parliament following a record month of borrowing last September, Gordon Brown defended  the government’s level of borrowing, claiming at the then quoted level of 37.5% of GDP, the UK’s national debt was “considerably lower” than it had been when the party came to power in 1997. The current Chancellor, Alistair Darling, concluded with the statement: “I’m confident we have made the right judgement, and the government can meet all its objectives and obligations.”

The ‘real level’ of UK national debt

It is often argued, not least by the conservatives, that the total level of the UK’s national debt is in reality far higher. This is because national debt figures quoted by the government don’t include the considerable pension contributions owed by the government to public sector employees and private finance initiatives such as the nationalization of Northern Rock.

As such, The Centre for Policy Studies, another think tank, argues that the real national debt is actually £1,340 billion, which equates to a massive 103.5%of GDP.

Problems resulting from high national debt

Interest Payments. The cost of paying interest on the government’s debt is extremely high. In 2008 Debt interest payments will be £31 billion a year - an estimated 2.5% of GDP. In 2009, they will be £35 billion. Public sector debt interest payments could become the 4th highest government expenditure after social security, health and education, eating into investment in all these areasThis results in higher taxes on earnings and investmentsCrowding out of private sector investment and spending as higher interest rates prohibit spending and investment by businesses and individualsThe debt problem will only get worse as an ageing population places greater strain on the UK’s pension liabilities. There will be less money available for pensions and social welfareNegative impact on Exchange Rate – fall in the value of sterling depleting the ‘real’ wealth of UK citizens and businesses as well as discouraging investment in the UK from abroad.

How could added debt affect you?

Increased cost of university tuition fees as government forced to reduce cut back spending on education; higher interest on student loan repaymentsHigher level of taxation on your salary from your first jobHigher interest rates - less/ more expensive borrowing available to you in future years; harder to get a mortgage or a carHigher level of national insurance to service debt repayments, again reducing income levelsSlowdown in UK business activity due to a lack of confidence and high interest rates; sluggish economic growth over the next decade and a slow job market with fewer opportunities for graduates

Opportunities for working abroad reduced as British companies cut back on foreign operations due to unfavourable exchange rate.