What Caused Britain's £1 Trillion Debt Crisis?

David Cameron

First Posted: 24/01/2012 12:34 Updated: 24/01/2012 12:39   PA

The Government's £1 trillion debt mountain is the legacy of nearly a decade of the state living beyond its means and the pain caused by the financial crisis.

The last time the Treasury's books recorded a surplus - by spending less than its income - was in the 2001/02 financial year when it made a meagre repayment of £243 million.

But ever since then, politicians have been borrowing to fuel a spending drive, pushing up its net debt.

The debt, which is measured as the state's liabilities minus its cash, only increased gradually in the early part of the noughties when the economy was booming.

But the financial crisis, driven by companies and households having too much debt, ironically, sparked an explosion in Whitehall borrowing.

Net debt, excluding the short-term effects of financial interventions such as bank bailouts, rose to £1003.9 billion in December - nearly double the £534.6 billion figure at the end of 2007. This is the highest since records began in 1993 and now represents 64% of GDP.

This figure does not include the liabilities of the part-nationalised banks, which are due to be sold in the future, but has been pushed up significantly as the state was forced to borrow more to inject cash into them.

When the full impact of the nationalisations are added in, net debt hit £2.3 trillion, which is 149% of GDP, and reflects the full cost of bringing parts of Royal Bank of Scotland, Lloyds, Northern Rock and Bradford & Bingley into public ownership.

The surge in debt was also brought about by the recession, as the UK suffered a big crash in GDP lasting for six successive quarters and hurt the Government's tax haul. GDP is still 3% below its peak.

The Labour administration did not cut spending in line with the falls in its income and instead opted to borrow more to stimulate the economy. Its initiatives included a car scrappage scheme and a cut in VAT to 15% from 17.5%.

Vicky Redwood, chief UK economist at Capital Economics, said: "The trillion debt figure has mainly been caused by the adverse
impact of the recession.

"Part of it was the money spent on sorting out the financial system but a big role was played by the drop in GDP and the knock-on effects for public finances.

"It could also be argued it was also partly due to Labour overspending before the public crisis - they could have had the public finances in better shape."

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Filed by Stephen Hull  |