Britain’s Debt Problem Is Getting Worse - What Happens Next?

Market Maker

The episode examines the escalating crisis of UK government borrowing and its broader implications for national fiscal stability. Hosts Anth

Key takeaways

• UK government borrowing reached £18.3 billion in August, significantly higher than expert forecasts.
• Interest payments on UK debt hit a record high of £8.8 billion for the month of August.

Main topics

• UK Public Debt and Borrowing
• Bank of England Monetary Policy

Notable quotes

Debt costs skyrocketing like a staircase to nowhere.

Conclusion

While the UK faces significant fiscal headwinds from rising debt costs

Transcript preview

Speaker 2 (0:00) UK government borrowing surges to new record highs. Dismal picture for public finances ahead of the autumn budget. Yields hit their highest level in the G7. And billionaires warn Britain is on the slide. I purposely grabbed those four headlines just for you. This Speaker 1 (0:20) is going Speaker 2 (0:20) to be a great Speaker 1 (0:21) episode. Can't wait. Speaker 2 (0:24) So yeah, I mean, if you picked up a newspaper or opened up... perhaps your news app this week, you would have seen these sorts of headlines. A dismal picture for Britain. Debt costs skyrocketing like a staircase to nowhere, was what the IMF director said. And on top of that, yeah, your wealth creators threatening a mass exit. So sounds sensational, but behind the dramatic media noise, there is a real, very high-stakes story unfolding in global financial markets close to home here where we're situated in the UK. and one that could hit every single household in the country. So why is your mortgage rate getting stuck above 5 %? Why are your taxes almost certainly about to go up in October? And how on earth is a conflict thousands of miles away in the Middle East suddenly dictating the size of the UK government's bank account? So today's episode, we're going to try to cut through some of the panic, if we can, tame that fire. Look at the actual numbers. So pull back the curtain on the £18 billion public borrowing hole. Bond vigilantes, talked about before, I'm sure we'll get a mention again, holding the Chancellor hostage and why global debt markets, not politicians, ultimately are the ones really ruling this country. So as Speaker 1 (1:39) ever, joined by Piers Curran, Speaker 2 (1:41) co-founder of Amplify Me. How are you, Piers? Speaker 1 (1:47) Well, more depressed than I was two minutes ago. I Speaker 2 (1:53) know you sounded quite pumped before I hit the record button and I've just hit you with that sucker punch. Speaker 1 (1:59) Killed the vibe. I mean, I'm not sure I can do this now. Speaker 2 (2:03) Maybe you want to come out of this room, go across the corridor and open the room that says USA on the front. You'll probably have a better time Speaker 1 (2:11) in that one, to be honest. Speaker 2 (2:13) And even though the situation is worse, at least they've got a better way of masking it, I guess, from a media perspective. Speaker 1 (2:22) Yeah, you know, times are, it depends. Yeah, you're an optimist, a pessimist. Who are you? Like, what angle are you coming at this from in terms of how you're analysing the UK? You know, all these different... These different directions, you know, can have different opinions, different views. But, you know, I would say broadly, the majority stance is building, and that's a stance, and not just necessarily about the UK, but that, you know, government debt levels are perhaps getting a little unsustainable. And it's fine when debt's cheap. That's really the key thing, right? We've had a debt problem really since the great financial crisis in 2008. It's just the interest rates were at zero after that crisis and kind of stayed at zero an incredibly extended, unusual period of time at the bottom of the interest rate cycle. The bottom was zero, so the lowest it's ever been in any interest rate cycle ever, but it stayed at the bottom. Speaker 1 (3:32) a decade plus. This is what we call the zero interest rate environment, right? And so if interest rates are low, debt's cheap. So if you've got a shitload of debt, but interest rates are low, you can afford it. The problem comes when you've got a shitload of debt that's getting bigger and bigger and interest rates start going up. And then, of course, it's not sustainable. Speaker 2 (3:57) Yeah, I guess think of this on a consumer level. You know, if you've got a... credit card or have ever used your credit card and let's say it's close to being maxed out and you're used to paying a set percentage point then all of a sudden it gets jacked up to double digit plus numbers you know that's pretty much what's happening across the whole countries right now right from a theoretical perspective yeah Speaker 1 (4:22) and like the other classic is the mortgage you know if you have a mortgage on your property um then You know, in the UK, we've got quite a short-term sort of mortgage periods where, as a nation, we typically, the banking system sells mortgages that have short-term periods, two-year. You know, you'll have an interest rate that's fixed for two years or three years or five years, right? And then when it comes out of that period, you either roll it and... buy a new mortgage for another two-year fixed period, or you don't and you just come off the fixed and go variable. So the problem is that since the Bank of England started raising rates middle of 2022... then if you've had to remortgage, you know, at any point in the last three years now, if you've had to remortgage, you're remortgaging at a way higher rate than you had, you know, pre-2022. So, and when you've got a massive amount of debt on your property, the cost of that mortgage, you know, your outgoings on a month-by-month basis suddenly jump. And of course, And jump by hundreds. It obviously depends on the size of your mortgage, right? But hundreds of pounds a month, if not thousands of pounds a month, right? And that's just money that vanishes and doesn't get spent on the high street and therefore obviously then starts to have a net negative feedback loop through consumption drops, GDP growth drops, and so on. Add to that the inflation problem. So not only... are our interest rate, sorry, our interest costs going up, but then the cost of stuff we're buying is going up as well. So that you get that kind of double whammy effect on your purse strings, as we say, and the ability for the consumer to actually get out and spend, which is what the economy, you know, developed economies rely on. It's always, you know, super roughly 70 % of GDP is consumption. Speaker 1 (6:29) If you've got a problem with consumption, you've just got a problem. Speaker 2 (6:34) So you can vote for Trump and get $5,000 now, isn't that the case? Let's Speaker 1 (6:39) go. Let's do it. But I say, look, it depends on where you come from, your direction of attack, or not attack, your direction of analysis. So, for example, the IMF, okay? They're obviously a third-party independent body, you know, not a sovereign. They're not linked to any country. And so they're supposed to be this, you know. third-party unbiased bystander. So the IMF chief's analysis, well, basically just saying broadly about the global debt is climbing like a staircase, as you were saying, but around the UK specifically, or no, sorry, not about the UK specifically. Again, more broadly, a general comment. There are two things I'm quoting here. There are these two things that must be done, she said. This is the IMF chief. She said, bring debt levels down. and put fiscal consolidation as a priority and make sure that the central banks deliver on their mandate of price stability. So it's very, very, very easy for her to say that sentence. Speaker 2 (7:47) Backseat driver. Speaker 1 (7:49) Yeah, right. You got about 25 words that came out of her mouth, okay? And there is no one on the planet that can argue with that. She's right. Yes, of course, we need to get debt down. Fiscal consolidation, therefore, needs to be a priority. I agree. And obviously, the bank's job is price stability. Yes, we need to do all of those things. But here comes the problem, you know, from a political point of view. And she did allude to this. She said, it is impossible to stress strongly enough how critical it is to get the courage, the courage to take the steps that are necessary. These are politically tough steps to take, she said. but necessary. So that's it, right? They are politically tough. And herein lies the problem of democracy. Speaker 2 (8:35) Yeah. What is your incentive when, you know, you take a, let's say, a range of four to five year term as government? Speaker 1 (8:47) I Speaker 2 (8:47) mean, these debt terms are more often than not well beyond that. And isn't that just someone else's problem? Speaker 1 (8:55) So, well, that's right. The next, you know, the next government can sort that out. Like, how do you win an election? Giveaways. We're going to spend more on services, you know, X, Y, Z population. We're going to spend more and your services are going to be better. Your life will be better. We're going to tax you less, so you're going to have more money in your pocket. These are obviously great soundbites and they win elections. The problem is you need to borrow money to fulfill those promises. And so that's why our debt levels go up and up and up. And yeah, fine when interest rates are zero. When they're not, it's not fine. It's just that, you know, if you, to deal with the problem, you've got to start spending less as a government and or... tax people more, both of which will lose you votes. So there's actually, I don't know, there's a mechanism here, an unbreakable mechanism. You might say, unless, and the only way to break the mechanism, it's not quite unbreakable. It's only breakable in the moment of absolute crisis. So when the debt situation gets to the point where you default. then you are forced into a bit like Argentina is a good example actually go and look at what the Argentinian government have been doing over the last few years with regards to fiscal adjustment you know that came out of chronic absolute crisis we now have no choice So we're nowhere near that point as a nation like the UK or the US or France have got that point. We're nowhere near that point. But the problem is no one quite knows for sure how far away that point is. That's up for debate. Speaker 2