Borrowing can make a country rich… until it doesn’t
Debt can fund investment. But when it is used to pay for today’s consumption rather than tomorrow’s growth, the bill becomes unbearable, says Martin Beck
At a personal level, millions borrow to buy their first home, start a business or invest in education. Used wisely, debt allows people to bring forward opportunities that would otherwise take decades to achieve. The same logic applies at a national level.
In the UK, public borrowing has historically been used for productive purposes. After the Second World War, government borrowing helped finance reconstruction and the expansion of the modern economy. It funded major infrastructure projects from the motorway network to large investments in energy and the expansion of higher education. In 2008/09 it helped stabilise the economy during the financial crisis.
Borrowing was used to build the future. The absolute size of the debt mattered less than the country’s ability to service it. As economies grow and incomes rise, the burden becomes easier to carry.
In short, debt works when it finances growth.
The changing nature of borrowing
After the financial crisis, the coalition government introduced measures designed to bring borrowing under control. The politics of that period remain fiercely debated, but the trajectory is clear. Annual borrowing fell from £153bn in 2010 to £41bn by 2018/19. In other words, the financial roof was being repaired ahead of the next storm.
That storm arrived in March 2020 in the form of Covid with 2020/21 government borrowing surging to £322bn, the highest level in modern British history. At the time, few disputed the decision. But when the pandemic ended, something important had changed. That level of borrowing had become normal.
Rather than financing long-term investment, debt increasingly began funding the day-to-day machinery of government: the rising costs of an ageing population, welfare commitments and political promises. Governments were no longer borrowing to build the future but to smooth the present.
Borrowing that stood at £41bn in 2019 is now projected to exceed £120bn in 2025/26.
The perfect storm
At the same time, interest rates have risen sharply, making that debt far more expensive to service. For much of the 2010s governments benefited from historically low borrowing costs. Those days are over.
Bank of England base rates rose from 0.1 per cent in 2021 to 5.25 per cent in 2023 before easing slightly, but they remain far higher than the previous decade.
The result is a perfect storm.
The UK’s national debt has risen from around £1.8 trillion in 2019 to £2.9 trillion today. Interest payments have tripled to more than £350m per day. Every pound spent on interest is a pound that cannot be spent on public services. Unlike a household mortgage, the national debt is never paid off. It is continually rolled over, generating ever larger interest payments.
Debt becomes dangerous when it funds everyday spending while the cost of servicing it spirals.
But that is where we now find ourselves. In 2025/26 Britain will spend roughly £120bn servicing its debt — more than the defence budget. That money must be paid before a single pound is spent on teachers, nurses or defence.
The political incentive problem
It is tempting to blame politicians alone for this situation. But voters must accept a share of the responsibility. Most parents would support their children borrowing to buy their first home or invest in education. Few would support their borrowing to fund an unaffordable lifestyle. Yet that is effectively what modern politics encourages.
Borrowing allows governments to deliver benefits today while pushing the bill into the future. This creates a powerful structural bias towards ever higher borrowing with every election campaign promising more spending, better services and lower taxes at the same time.
The politics work. The arithmetic doesn’t.
The intergenerational bill
Younger generations are not simply inheriting a society. They are inheriting a balance sheet which includes the national debt, unfunded state pensions, and rising healthcare spending. Demographics just increase the pressure on fewer workers supporting more retirees.
I am not anti-debt. But I am pro-candour. Our political masters should be clear that younger generations are going to face higher lifetime taxes to fund commitments made in the past. The answer is not panic or austerity slogans. It is honesty about the scale of our obligations, the burden placed on future generations, and the difficult choices required to put our economic house in order.
Because borrowing can make countries rich.
But only until it doesn’t.
Martin Beck is chief economist at WPI strategy