Closing the deficit isn't enough: UK debt is a risk to financial stability

 
Mike Turley

ELECTION 2015 is now under a year away. The battle lines are forming, but will any party set out credible plans for tackling government debt? While the deficit is falling, the nation’s debts are growing – with a far-reaching effect on government and public services.

In the coming months, each political party will be preparing its election manifesto and strategies for coalition discussions, should they be needed. In 2010, the Conservatives and Lib Dems set a precedent for brisk coalition deals in the UK by agreeing their 36 page programme for government in five days. In Germany, Angela Merkel’s Christian Democratic Union and the Social Democrats took five weeks last year to produce an albeit beefier 185 page agreement.

The UK’s deficit reduction programme is also proceeding at a relatively brisk pace. If all goes to plan, the deficit – £159bn at its 2010 peak – will be no more by 2018-19. That’s as long as this government and the next stick to the plan and the economy plays ball.

But moving to a budget surplus will not fully heal the public finances. Our government debts stand at £1.2 trillion, and are forecast to rise to £1.5 trillion by the time the deficit is beaten in five years. We are clearing the overdraft but adding to a loan.

This year, the UK also passes the grim milestone of spending £1bn each week in central government debt interest. That is forecast to rise to the equivalent of £1.4bn per week by this stage in the next Parliament.

This should not just concern accountants – it has a pervasive effect on the state and the resources available to deliver on its commitments. The £52bn the government will spend on debt interest this year is money that could be better spent on public services or infrastructure investment. This year’s interest payments would almost cover the entire annual education budget.

Such a substantial amount of debt also leaves the UK at continued risk to external financial forces. Interest rate increases could be a shock. Worse still, a further financial crisis, or another unforeseen event, could have worrying consequences for our public finances. Our capacity to borrow would be limited.

Our rising debt levels have been reflected in the state’s overall financial liabilities on its balance sheet. The accountant’s view of the UK public sector – published as Whole of Government Accounts – shows assets of £1.3 trillion and liabilities of £2.6 trillion. Those liabilities represent obligations on the state, including the future cost of decommissioning nuclear facilities and negligence claims against the NHS. They have risen by £137bn in the three years since the government has produced such accounts.

As investors know, balance sheets can tell a deep story about the financial health, sustainability and decision-making within a company. The same is true of government – and a reading of the government accounts suggests that future spending decisions must be made in full light of their impact on long-term liabilities, especially government debt.

It may not be a vote winning issue, but debt interest represents a significant risk to the UK’s financial stability. The electorate should be asking each party for their action plan to tackle it.

Mike Turley is head of public sector at Deloitte.