By the time this crisis is over, national debt will go well above 100pc of GDP to levels unseen since the aftermath of the Second World War, adding to an already grim long-term picture.
Pre-Covid OBR projections already had debt-to-GDP hitting 250pc by 2060 as we deal with pressures such as an ageing population and decarbonisation.
Why does high debt matter?
It may seem odd to worry about debt servicing costs the week the Government sold bonds at negative yields for the first time. But whilst interest rates are low now – and we should do all we can to lock them in by issuing long-term debt – having a high stock of debt will leave us exposed to even small movements in rates for decades to come.
If rates rise to the Bank of England’s current estimated equilibrium rate of 2.25% then, according to the Resolution Foundation’s most optimistic scenario for the public finances, the Government’s debt-service-to-revenue ratio would rise well above the 6pc permitted by the Conservative manifesto.
Under their most pessimistic scenario, it would reach 12%, a level last seen in the 1980s. In today’s terms, that would mean annual interest payments close to £100 billion – roughly equivalent to our entire education budget.
That we will leave this crisis with debt at historically high levels already leaves us very exposed to future interest rate rises – and that’s before factoring in future shocks. In just over a decade, the fallout from the financial crisis and Covid will see our national debt at least triple as a share of GDP.
Recessions are a fact of life, each taking its toll on our debt. If we don’t take action to get debt down when the economy is growing strongly, that debt – and therefore our exposure to rate rises – will just ratchet up over time.
Arguing we should reduce debt once the economy recovers is not to say we are on the verge of a sovereign debt crisis, or that reducing debt should be the primary focus. Debt reduction must be balanced with the important role public spending and tax can play in driving growth.