The Consequences of High Government Borrowing

10 January 2025

Here are some notable instances in UK history when government borrowing increased significantly, along with the consequences:

1. The Napoleonic Wars (1803–1815)

Borrowing Surge:

  • The UK borrowed heavily to finance military campaigns against Napoleonic France. By the end of the wars, public debt had ballooned to over 200% of GDP, one of the highest levels in British history.

Consequences:

  • High interest payments on the debt burdened the economy for decades.
  • Taxes were raised, particularly on goods like tea and sugar, which disproportionately affected the poor.
  • Economic stagnation followed, with low growth rates persisting for much of the early 19th century.

2. World War I (1914–1918)

Borrowing Surge:

  • The UK borrowed heavily, both domestically and from allies like the United States, to fund the war effort. By 1919, debt reached 160% of GDP.

Consequences:

  • The debt led to severe austerity measures in the 1920s.
  • The “Geddes Axe” (1921–22) slashed public spending on welfare, education, and defense, deepening social inequalities.
  • Economic growth remained sluggish, and high debt constrained fiscal flexibility for decades.

3. World War II (1939–1945)

Borrowing Surge:

  • The war effort pushed borrowing to unprecedented levels. By 1946, debt peaked at nearly 240% of GDP.

Consequences:

  • Post-war reconstruction required additional borrowing, but economic policies like nationalization and welfare state expansion mitigated some impacts.
  • Debt servicing took a significant portion of the budget, but growth in the 1950s helped reduce the debt-to-GDP ratio over time.

4. The 1976 IMF Crisis

Borrowing Surge:

  • Stagflation (economic stagnation + inflation) in the 1970s, combined with high oil prices, caused fiscal deficits to spiral.
  • The UK government borrowed heavily and had to seek a £2.3 billion bailout from the International Monetary Fund (IMF).

Consequences:

  • The IMF imposed austerity measures, including public spending cuts.
  • Social unrest and strikes erupted (“Winter of Discontent”).
  • Economic credibility was damaged, and borrowing costs increased temporarily.

5. The Financial Crisis (2008–2009)

Borrowing Surge:

  • The UK borrowed heavily to bail out banks (e.g., Royal Bank of Scotland, Lloyds) and stimulate the economy. Debt increased from 35% to over 60% of GDP in just two years and continued to rise, exceeding 80% of GDP by 2013.

Consequences:

  • Austerity measures in the 2010s cut public services significantly, contributing to prolonged wage stagnation and growing inequality.
  • Public dissatisfaction with austerity became a major political issue, influencing events like Brexit.
  • Recovery was slow, and borrowing costs remained relatively low due to quantitative easing.

6. COVID-19 Pandemic (2020–2021)

Borrowing Surge:

  • Emergency measures, including furlough schemes and healthcare spending, pushed borrowing to record peacetime levels. Debt exceeded 100% of GDP for the first time since the 1960s.

Consequences:

  • While short-term borrowing costs remained low, the long-term fiscal outlook worsened due to inflation and rising interest rates.
  • The UK faced challenges in balancing recovery spending with managing inflationary pressures.
  • Debate continues over whether austerity or growth-focused policies should follow.

General Consequences of High Borrowing:

  1. Inflation Risk: Borrowing, especially when combined with money printing, can drive inflation.
  2. Crowding Out: Government borrowing can lead to higher interest rates, making it costlier for businesses to borrow.
  3. Intergenerational Debt: High debt burdens future generations with repayment obligations.
  4. Policy Constraints: High debt limits a government’s ability to respond to future crises.

Each borrowing spike occurred in response to extraordinary circumstances but often left a lasting impact on the economy and society.