National debt could leave general election winners with ’empty war chest’ | Personal Finance | Finance

Whichever party wins the next election will have a “pretty empty war chest” to help deliver its manifesto pledges, an expert has said after the latest government borrowing figures were released. The stark warning comes as figures published on Tuesday (January 23) show Britain’s debt to GDP ratio still at levels not seen since the early 1960s.

Total net debt was £2.69trillion at the end of the year, which is around 97.7 percent of the size of the economy, or gross domestic product (GDP). That is way above the IMF’s debt sustainability threshold of 50-60 percent of a country’s debt to GDP ratio.

Laith Khalaf, Head of Investment Analysis at AJ Bell, told Express.co.uk there is a small chink of daylight opening up in the public sector finances this year, as borrowing came in £5bn lower than expected.

But he warned: “However, precisely how much headroom the chancellor (Jeremy Hunt) will have in the forthcoming Budget will depend largely on forecasts looking further out, which is where his fiscal targets come into play.

“Overall as things stand it looks like he’s going to have some money to play with, and in an election year that almost certainly spells tax cuts. Which taxes will be cut is the sixty four thousand dollar question.”

Mr Khalaf added: “This close to an election, anything is possible, though it seems more likely the chancellor will opt for tax cuts that can stimulate the economy.

“Paying down borrowing looks off the cards as successive chancellors have banked fiscal windfalls and then turned to debt markets when things go sour.

“With debt being run so close to the wire of fiscal targets, this means whoever wins the next election is going to have a pretty empty war chest to help deliver their manifesto.”

Professor Sambit Bhattacharyya, Head of the University of Sussex Business School’s Economics Department, told Express.co.uk the drop in Government borrowing was not a surprise.

He said: “UK government borrowing declined to £7.8billion. This is unsurprising as output continues to slow. Borrowing needs are lower for a smaller economy and hence smaller budget deficit.

“However, national debt continues to rise. The debt to GDP ratio increased by 1.9 percentage points, reaching 97.7 percent. This implies output slowdown is faster than the reduction in borrowing.”

Professor Bhattacharyya said the UK’s debt to GDP ratio is not benign, adding current UK figures significantly surpass the IMF’s 50-60 percent threshold.

He explained the high debt to GDP ratio will affect the cost of borrowing for the Government and thereby increase debt servicing costs. This in turn means less resources for the welfare state.

The interest the Government paid on loans was £4bn in December 2023, which is £14.1bn less than a year earlier. This was largely because inflation – as measured by the Retail Prices Index – dropped from its peak.

Public sector net borrowing hit £7.8bn during December, according to figures released by the Office for National Statistics on Tuesday (January 23).

That was £8.4bn less than a year earlier and the lowest in any December since 2019. Experts had expected it to reach £11.4bn.

Chief Secretary to the Treasury Laura Trott said in a statement issued in response to the figures: “Protecting millions of lives and livelihoods during Putin’s energy shock and a once-in-a-century pandemic has created economic challenges.”

She added: “However, it is right that we pay back these debts so future generations are not left to pick up the tab.

“Because of this Government’s decisive action, the economy is now beginning to turn a corner. Inflation has more than halved.

“Debt is on track to fall as a share of the economy. And we have been able to afford tax cuts for 27 million working people, and an £11billion tax cut to drive business investment.”

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, said falls in gilt yields, being the interest the Government pays on some of its loans, and the expectation interest rates will fall open up more room for the Treasury.

He said: “In the budget on March 6, Hunt almost certainly will cut personal taxes in a bid to improve his party’s chances in the General Election.”