By Bob Lyddon – 4 minute read
THE UK’S DEBT is already nearly the same size as the whole UK economy and is continuing to increase. The Labour Government’s plan to introduce a new measure of it, so as to understate it, is already so far from reality it cannot fool the public, investors, and public credit rating agencies.
Renationalisation and the Net Zero transition will expand the acknowledged ‘public sector’, and the state-directed sector, in which private companies are engaged to deliver on public policy objectives.
That is the predicament revealed in my paper ‘The structure of the UK’s public finances and the amount of the UK’s public debt’ published today by Global Britain at the foot of this blog.
It is the first paper in a four-part series about the UK’s public finances and Labour’s plans.
The figures published about the size of the UK public sector are neither comprehensive nor transparent: it is larger than the commonly assumed figure of 40 per cent of the size of the economy (meaning of GDP or Gross Domestic Product), because New Labour’s 1997-2010 Private Finance Initiative is excluded along with rafts of services paid for out of public budgets that are delivered by privately-owned enterprises.
We have a growing sector of the economy which is the state-directed one: ostensibly private, but acting to meet public policy objectives – notably Net Zero. The state-directed sector is displacing entrepreneurialism and wealth creation.
Nor do we have a watertight and comprehensive figure for all the debts that authorities have signed taxpayers up to funding, including those disguised within New Labour’s Private Finance Initiative (PFI). Our estimate puts ‘Public Sector Gross Debt’ at 116 per cent of GDP.
Instead, the authorities present several measures, each one playing around with excluding this or that line of debt, offsetting this or that asset, and producing lower and lower figures:
- ‘General Government Gross Debt’ – 105 per cent of GDP
- ‘Public Sector Net Debt’ – 97 per cent of GDP
- ‘Public Sector Net Debt less Bank of England’ – 90 per cent of GDP
This is dangerously delusional. The authorities, by producing statistics that are below 100 per cent of GDP, have succeeded in establishing 100 per cent-of-GDP as some kind of acceptable norm, and in inferring that anything below 100 per cent represents ‘headroom’ for more borrowing.
The following policies of Keir Starmer and Rachel Reeves will exploit this non-existent ‘headroom’ and expand debt:
- Borrowing by new mayoral authorities;
- Renationalisation, for example of the railways, so that the debts of these renationalised companies fall within the national debt;
- Establishing new ‘Public corporations’ like the National Wealth Fund and Great British Energy and permitting them to borrow;
- Repeating PFI in schemes for Net Zero in particular
At the same time the Labour Government has contended that borrowing to fund day-to-day costs will stop, a pious hope when day-to-day costs appear to be out-of-control and rising inexorably.
The Government’s proposed trick is to increase ‘Borrowing for investment’ and to re-measure national debt so as to exclude what is borrowed for investment. The new measure is called ‘Public sector net liabilities’, and is coming in as an even lower percentage of GDP than ‘Public Sector Net Debt less Bank of England’.
The Government intends to borrow and use the money to build of a lot of new assets. By presenting a figure for ‘net liabilities’ and not ‘net debt’, Labour will net the value of the asset off against the debt taken on to build it. The measure ‘Public sector net liabilities’ will not rise. Thus, the extra debt is magicked away.
The debt really does exist, however, because it attracts interest, and, because of the type of financial scheme involved – a replica of PFI – the interest rate is likely to be 9-10 per cent per annum. The cost of this debt falls on the taxpayer one way or the other.
If one combines this type of highly expensive scheme with a statistical measure that puts no ceiling on the total amount that can be borrowed, then you have the recipe for a financial disaster.
Bob Lyddon is an independent financial analyst specialising in international and central banking.
If you appreciated this article please share and follow us on Twitter hereand like and comment on facebook here. Help support Global Britain publishing these articles by making a donation here.
FULL PAPER
The UK’s public sector and the national debt are larger than ‘official’ figures on the UK’s public finances state, and both are on a growth trajectory
21 May 2025
Introduction
THE UK’S PUBLIC SECTOR accounts for a much larger share of the UK’s economy than figures on the UK’s public finances state, and the amount of debt for which UK businesses and individuals are responsible is much larger as well.
This is the summary of the first of four papers on the UK’s public finances, written in the first quarter of 2025 , published through Global Britain, and entitled ‘The structure of the UK’s public finances and the amount of the UK’s public debt’.
The paper lays out the different entities and arrangements that constitute the public sector, and it explains how the UK’s debt is built up, as well how it is likely to develop over Labour’s term of office.
Size of the public sector
The UK public sector is larger than the 40 per cent of the size of the economy that it is commonly taken as being. This is because of the grey areas where ostensibly private enterprise is undertaken at the state’s behest:
- Services paid for out of public budgets that are run by privately-owned enterprises;
- Private Finance Initiative projects.
Blindspots in public expenditure statistics
Statistics for public expenditure focus on central government, and are not comprehensive when it comes to:
- Expenditure of local government, especially where it is funded by charges and fines, as opposed to through council tax, business rates and the central government block grant;
- Expenditure of quangos where they have their own income, on top of funding from central government;
- Expenditure of ‘Public corporations’.
GDP tied up with the public sector
We do not have a watertight statistic for the percentage of the UK’s Gross Domestic Product (GDP) which is occurring at the behest of the public sector. The traditional delineation between public sector and private sector has become outmoded with the rise of the state-directed sector: economic activity which the state is directing and in which it may have taken on financial risks (by investing, by lending or by issuing guarantees) but where the majority of the activity is being recorded through the accounts of private enterprises.
Renationalisation and the transition to Net Zero will raise the size of both the acknowledged ‘public sector’ and of the state-directed sector.
Structure of the UK’s debts
Nor do we have a watertight statistic for the amount of debt for which UK tax-liable entities (broadly businesses and private individuals) are responsible.
The amount goes well beyond the UK’s government bonds and government bills.
‘Local government’ has up until recently taken up its borrowings from central government, thus avoiding any doubling up. However, the Labour Government has granted borrowing powers to new mayoral authorities, which would be incremental to the borrowings of the individual local authorities within the boundaries of the mayoral authority. These new borrowings do not have to be taken up from central government: they can be taken up from banks and other lenders.
Local government holds considerable deposits from developers for social, affordable, and low-rent housing projects, another form of indebtedness.
National Savings holds around £124 billion of savers’ money.
The Bank of England has a latent loss of around £180 billion on the bonds it bought into its Quantitative Easing programme. Each time it sells a portion off in the open market, it realises a loss in cash. This loss is reimbursed to it by HM Treasury, which has to issue new government bonds to make these payments, so the Bank of England’s losses – when they are realised – directly add to the UK’s debts.
The above debts in the amounts stood as they stood at the end of 2024 added up to around 112 per cent of the UK’s GDP of £2.7 trillion. Given the UK’s lacklustre economic performance during 2024 and the habit of the Office for National Statistics of issuing GDP figures and then subsequently downgrading them, 2024 GDP has been taken as being unchanged from 2023.
Reducing the appearance of National Debt
Whilst this amount – ‘Public Sector Gross Debt’ – was around 112 per cent of GDP, UK authorities preferred to present:
- ‘General Government Gross Debt’, which excludes debts of ‘Public corporations’ such as the Bank of England, and which was around 102 per cent of GDP;
- ‘Public Sector Net Debt’ which ought to be based on the 112 per cent of GDP that is ‘Public Sector Gross Debt’ but it is not. It denies the existence of the Bank of England’s latent loss of £180 billion (7 per cent of GDP). The startpoint is nearer 105 per cent of GDP, and is then reduced to around 97 per cent of GDP by the offsetting of various assets owned by UK public sector entities;
- ‘Public Sector Net Debt less Bank of England’, where the latent loss of £180 billion is not just ignored, but is re-characterised as an asset of about 7 per cent of GDP, such that on this measure the UK’s debt can be presented as nearer 90 per cent of GDP.
Private Finance Initiative (PFI)
‘Public Sector Gross Debt’ is not the end of it. The 112 per cent of GDP does not include the hangover left by New Labour in the form of its PFI projects between 1997-2010.
These projects are debt-funded but so structured that the debtor is a private sector enterprise, and so that the public sector makes its payments under a commercial contract, not a financial one. The commercial payments are calculated to cover the debt service of the private sector enterprise, and the creditors of the private sector enterprise see their credit risk as being on the UK public sector.
The commercial PFI payments out to 2052 are a form of public debt, and can be re-expressed as if they were made under a financial contract. In that case they would be accounted for as a debt of £97 billion, adding a further 4 per cent of GDP to the national debt.
That would take ‘Public Sector Gross Debt’ up to 116 per cent of GDP.
Labour policies
The Labour Government’s policies will expand the amount of money for which UK taxpaying entities are liable in a number of ways:
- Borrowing by new mayoral authorities;
- Borrowing externally from third-parties, as opposed to from central government, by both these mayoral authorities and by local authorities, including ones within the area of a mayoral authority;
- Renationalisation, for example of the railways, so that the debts of these renationalised companies fall within the national debt;
- Establishing new ‘Public corporations’ like the National Wealth Fund and Great British Energy and permitting them to borrow;
- Repeating PFI in schemes for Net Zero in particular, which is an archetypal state-directed initiative: the likes of the National Wealth Fund and Great British Energy will take on financial risks (by investing, by lending or by issuing guarantees) but the majority of the activity will be recorded through the accounts of private enterprises.
All of these will increase the national debt, whilst at the same time Labour has contended that borrowing to fund day-to-day costs will stop.
‘Borrowing for investment’ and Labour’s new measure of the national debt
The Labour Government intends to direct the building of a lot of new assets under the heading ‘public investment’, and the government’s stake in these assets will be borrowed, which is what Labour means by ‘borrowing for investment’. This is the other part of the central government spending budget from that which meets day-to-day costs.
Labour will net off its stake in the assets against the debt it took up to fund them, under its new measure of the national debt – Public sector net liabilities.
An accounting ‘round trip’ ensues: a borrowing is made, the proceeds are spent on the asset, the asset is valued the same as the borrowing, and the asset and borrowing are netted off against one another. The measure ‘Public sector net liabilities’ never rises.
However, the debt really does exist, it attracts interest, and, because of the type of financial scheme involved – a replica of PFI – the interest rate is likely to be 9-10 per cent per annum.
If one combines that with a statistical measure that puts no ceiling on the total amount that can be borrowed, then you have the recipe for a disaster in the medium term.
Conclusion
The UK’s public debt is between 100 per cent and 112 per cent of GDP, depending upon how one measures it.
It could be higher if one decided to include further the debts owed by the Bank of England, even beyond its losses on QE, and the Net Present Value of the New Labour PFI schemes of 1997-2010.
While there may be some case to be made for ‘Public sector net debt’, there is no feasible case for ‘Public sector net debt without Bank of England’. In turn that makes Labour’s ‘Public sector net liabilities’ a non-starter and a dangerous delusion.
New Labour left a massive bill for PFI; this new version of today’s Labour Government promises to leave a massive bill for their so-called ‘investments’.
Bob Lyddon is an independent financial analyst specialising in international and central banking.