Britain ‘can no longer ignore’ ballooning national debt

Britain is among Western nations threatened with a fiscal crisis as state spending balloons and investors lose their appetite for government bonds.

In a veiled warning to Sir Keir Starmer after his about-turn on welfare cuts, the Bank for International Settlements (BIS), said highly indebted countries can no longer keep borrowing vast sums to help plug funding gaps.

Given the threat of slow growth, high borrowing costs and geopolitical turmoil, Agustin Carstens, the BIS chief, said: “High levels of public debt are a significant vulnerability that governments can no longer ignore.”

The warning from the BIS, known as the central bank for central banks, came just days after the Prime Minister caved in to pressure from rebel MPs by abandoning plans to save £5bn on welfare.

Instead, he has introduced a fleet of concessions on disability benefits that are expected to cost as much as £3bn, piling further pressure on Britain’s strained public finances.

Asked about the fiscal challenges facing the likes of Britain, Mr Carstens said: “It is obvious that the debt [to GDP ratio] in many countries has risen quite fast in recent decades, and this trend cannot continue.

“We are not saying that in any particular country a fiscal crisis is imminent. But the trend is not the right one.”

Sir Mel Stride, the shadow chancellor, said: “Britain is living beyond its means. But Labour won’t listen because they’d rather please their backbenchers than face up to reality.”

Andrew Griffith, the shadow business secretary, added that the warning about precarious global finances should serve as a “wake-up call” for Labour.

Labour came to power promising a return to financial stability after the turmoil of Liz Truss’s mini-Budget and the spike in borrowing costs which ensued.

But the Prime Minister has struggled to pass even modest measures to control spending, having also rowed back on cuts to winter fuel payments this month.

Richard Tice, deputy leader of Reform UK, said: “Britain cannot keep spending more than we are earning. We have to create serious growth by cutting wasteful spending and slashing daft regulations, along with affordable tax cuts.”

As part of the BIS’s latest health check on the global economy, Mr Carstens also responded to queries about France, which is under pressure from soaring borrowing costs; and the US, where Donald Trump is seeking to cut taxes by increasing America’s deficit.

The senior central banker said that the sooner governments everywhere start to reduce their deficits, the less painful the shift will be. This is particularly important to allow nations to borrow during any future crisis like the pandemic, he added.

Britain’s national debt stands at £2.9 trillion, according to the Office for National Statistics, up from £1.6 trillion a decade ago and £349bn at the turn of the century.

As a share of GDP, debt has risen from 32.4pc in 2000 to 96.4pc today.

This was driven in large part by significant shocks such as the financial crisis and the pandemic, but also by a sustained failure of Labour and Conservative governments to balance the books in any financial year since 2000-01.

“While high debt can be sustainable when growth is robust and interest rates low, today’s conditions are far less supportive,” Mr Carstens said in a speech.

“Rising interest payments, driven by higher rates and refinancing needs, are putting pressure on fiscal accounts and increasing fiscal sustainability risks. Already, there are signs of weakening investor appetite for government bonds.”

Hyun Song Shin, the most senior economist at the BIS, said that rising debt interest payments are particularly troubling for governments around the world.

“Even if debt is sustainable, there could be a sense that debt is too high if, for example, debt servicing costs are higher than some of the core items of expenditure in the economy – education, defence,” he said.

In Britain’s case, the Government spends more than £110bn per year on debt interest, according to the Office for Budget Responsibility. That is higher than spending on defence – the department’s budget is £62.2bn this year – or education, at £100.9bn.

Financial markets are not yet in uproar over the sustained nature of Britain’s borrowing, but investors are on tenterhooks owing to the UK’s chequered past.

The last serious crunch came in 2022, when Ms Truss’s mini-Budget triggered a sell-off in the bond market.

A previous example was in 1976 when the UK’s economy was bailed out by the IMF.

A Treasury spokesman said: “As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus.

“Changes to tax-and-spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by almost £7bn and cut borrowing by over £3bn.”

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