UK National Debt Reaches Unprecedented Levels
Britain grapples with escalating debt, according to Hugo Duncan's assessment in the bond market.
In the past decade, the United Kingdom's national debt has escalated, nearing the staggering figure of £3 trillion as of mid-2025. This surge in debt can be attributed to a combination of economic shocks, fiscal policies, and external factors that have exacerbated underlying challenges in a growing economy and an aging population.
The Early Years (2010–2019)
Following the 2008 Global Financial Crisis, the UK's public sector net debt stood at approximately 62% of GDP in 2010 (around £1.1 trillion). Austerity measures were introduced to stabilise public finances after the crisis, initially slowing the rate of borrowing. However, debt continued to grow gradually as deficits persisted, and global growth remained subdued.
The COVID-19 Pandemic (2020–2022)
The outbreak of the COVID-19 pandemic triggered unprecedented fiscal stimulus, including furlough schemes, business support, and healthcare spending. This resulted in a sharp spike in borrowing, with public sector net borrowing reaching over £300 billion in a single year (2020/21), driving debt as a share of GDP above 100% for the first time in decades.
The Post-Pandemic and Inflationary Environment (2023–2025)
Debt growth has continued in the post-pandemic period, amplified by a new set of pressures. In the first three months of the 2025/26 fiscal year, UK borrowing was £57.8 billion, 15% higher than the previous year, reflecting ongoing fiscal demands and the inflationary environment.
Key Factors Driving Debt Growth
Large Fiscal Deficits
The UK has consistently run budget deficits over the past 15 years, with government spending exceeding tax revenues. Major episodes, such as the global financial crisis, the COVID-19 pandemic, and the post-pandemic cost-of-living crisis, required substantial emergency spending, further expanding the debt stock.
Rising Debt-Servicing Costs
Public sector debt interest spending reached £121 billion in 2023/24, reflecting a significant burden on the budget. The cost of servicing the national debt has surged due to both higher interest rates and changes in the structure of UK government liabilities—specifically, the shift from long-term, fixed-rate bonds to floating-rate instruments via quantitative easing (QE).
Monetary Policy and Quantitative Easing
QE was used aggressively during and after the financial crisis, but its side effects are now visible. The UK’s QE stock peaked at £838 billion, and the decision to remunerate these reserves at the central bank’s policy rate has effectively transformed a large portion of government debt from fixed to floating rate.
Inflation
High inflation increases the nominal value of existing debt and raises the cost of new borrowing. It also increases the size of the deficit by elevating both spending and borrowing costs.
External Shocks and Structural Pressures
Other contributing factors include demographic changes (an ageing population increasing pension and healthcare costs), sluggish productivity growth, and the lingering effects of Brexit on UK growth and investment. Moreover, global risks—such as higher interest rates, market volatility, and cross-border capital flows—have added to domestic vulnerabilities.
Conclusion
The UK’s national debt has ballooned since 2010, driven first by global crisis responses, then by extraordinary pandemic spending, and most recently by inflation and rising interest rates—especially due to the unintended consequences of monetary policy (QE) in a tightening cycle. Persistent deficits, an ageing society, and external shocks have all contributed to a debt trajectory approaching £3 trillion, with the pace of growth accelerating in the most recent years as servicing costs surge and inflation persists. The structure of government debt, particularly the shift to floating-rate liabilities, has made this growth especially sensitive to changes in monetary policy—a vulnerability that was not fully anticipated when QE was expanded post-crisis.
- The British government's debt reached £1 trillion in 2010 following the financial crisis.
- The UK's high borrowing costs are posing a significant challenge for the UK economy.
- The government's annual borrowing bill has been around 5% of GDP a year since the pandemic, levels only previously seen during recession or war.
- International investors charge the UK government more to lend it money than almost every other similar economy in the world.
Investing in UK government bonds may result in higher yields due to the increased finance needs of the government, which has been driven by economic shocks, fiscal policies, and external factors. The finance ministry faces high debt-servicing costs, making it a significant challenge for the business sector, with annual borrowing costs amounting to around 5% of GDP a year since the pandemic, levels only seen during recession or war.
