UK Budget 2015: Debt Reduction is Not Assured

As most expected, the UK budget was not characterised by endless pre-election giveaways, however an important point was the forecast reduction in public debt. A sign of austerity working? More a sign of low inflation, reducing debt repayments, asset selling and real GDP growth. In 2014, UK public debt was the ninth highest in the EU, slightly above the EU average, but lower than France, Spain and Italy. In constant terms it increased by 75% since 2008 and reached £24,313 per capita last year. The government’s forecast of 71.6% of GDP in 2020 will take it back down to 2009-2010 levels, but remaining way higher than pre-crisis.

Is the target attainable? Yes. Is it likely? As we’re in an election year it’s hard to say. Although the UK’s growth prospects are brighter than many European economies, forecast real GDP growth between 2016 and 2020 looks set to average 2.2%, but this is hardly a stellar performance. There are also serious risks to the outlook – including geopolitical instability and eurozone stagnation. Lingering concerns over a Grexit, or indeed, a Brexit. The impact of the oil price on inflation will lessen by the end of the year. A long-term significant reduction in public debt will require strong and sustainable real GDP growth and this will only be achieved by increasing productivity and investment; increasing wage growth and reducing household debt in order to spur consumption.

Public Debt in the UK: 2000-2014


Source: Euromonitor International from International Monetary Fund (IMF)

Note: Data are in constant 2014 prices