HMSM #04: - How does the UK’s national debt crisis affect you and what can you do about it?

In the last month and ahead of Chancellor Rachel Reeves’s upcoming Autumn Budget, the UK’s national debt level has come under increased scrutiny. The country’s debt currently stands at approximately £2.7 trillion. This figure is so high that it’s hard to really comprehend and therefore, worry about.

Put simply, it is so high that the UK government can only afford to pay the interest on its debt. Approximately 7-8% of UK taxpayer’s money goes on just paying interest on the national debt, more than what is spent by the government on defence, transport, public order and safety, housing and community amenities, and education (i.e. many of the things that are important to us and our families).

Worryingly, the Office for Budget Responsibility (OBR) has projected that our national debt will continue to increase dramatically over the coming decades. By 2071, the UK's debt is expected to rise to 274% of its entire economy. In simple terms, this means the government would owe nearly three times more than the total value of everything produced by all businesses and workers in the country that year.

So, what does this mean for us? Basically, an increasing share of taxpayer’s money will go towards interest payments, money that could otherwise be invested in public services and infrastructure.

This problem is not the result of one political party’s actions. It reflects decades of governmental mismanagement. Now, Rachel Reeves is in charge, but any talk of higher taxes or austerity in her upcoming Autumn Budget will be politically damaging. The levels of austerity that would be required to pay down our national debt is unimaginable. This means that future UK governments are far more likely to avoid the problem and continue racking up debt, instead of making any difficult decisions that would almost certainly lead to them being voted out.

How can the UK government solve this problem?

National debt of this size is already unsustainable. Given the UK's sluggish economic growth over recent decades, it's unlikely that the national debt can be significantly reduced through taxation or growth alone. This leaves the UK government three choices; defaulting on its debt (i.e. failing to make repayments), refinancing the debt, or more inflation.

Is defaulting an option?

Similar to how an individual who declares bankruptcy will destroy their ability to ever lend money again, if the UK government defaults on its debt, then it can kiss goodbye to ever receiving future funding. Investors that purchase government bonds, which funds a lot of government spending, do so because it’s seen as a given that they will be paid back again with interest.

If the UK government were to turn around one day to every investor and nation that lent it £2.7 trillion and declare that it could never pay them back, then it’d be unlikely to receive any investment or funding going forward. As the UK borrows billions of pounds each year to fund the NHS and public services, this would be catastrophic for the country. This means that defaulting on the debt is unlikely to be chosen by any serving government.

Is refinancing an option?

This tactic is equivalent to taking out a new credit card to pay off a previous one. This could temporarily reduce the burden of debt repayments in the short-term but also lead to longer-term costs such as paying more interest over a longer time period. More importantly, this option simply restructures the debt and does nothing in terms of paying it down.

Therefore, only one option remains that would allow the UK government to get rid of our national debt.

More inflation.

The government and Bank of England hold a silver bullet up their sleeves – they’re allowed to print money. If you can’t find the money to pay down your debts and you have this power at your disposal then you will use it. Governments will rarely admit this but the easiest way to repay trillions of pounds in debt is to reduce the value of the currency so much that £1 trillion isn’t that much. The way you do this is by creating more pounds and inflating the currency.

This is great news for governments because the real value of their debt declines as the currency its priced in loses purchasing power. However, for individuals, inflation erodes savings and increases the cost of everyday goods because they’re also priced in the currency that is losing its purchasing power.

The richest of society have already realised this. Instead of keeping their wealth in cash that they know will lose value, they’ve opted to store it in UK property. Whilst this has been effective in preserving their purchasing power, it has also contributed to other societal issues such as housing affordability. This is the unfortunate reality of inflationary currencies, growing wealth inequality where certain social classes increasingly own more of the assets whilst everybody else increasingly rents more.

This option is fraught with risk though. It may indeed help the UK government to reduce the real value of its debts, but there is always the risk that it can spiral out of control, leading to hyperinflation or stagflation. Hyperinflation is when prices rise uncontrollably at an extreme rate, while stagflation is the combination of high inflation and stagnant economic growth. Both scenarios would further erode the purchasing power of the pound, worsening the economic situation for everyone in the UK.

So, what can we do?

Historically, one of the best options has been to avoid saving in the currency that is almost certainly going to be devalued at our expense to deal with the increasing national debt payments. Instead, it makes more sense to save in scarcer assets than the pound, assets that cannot be so easily printed or produced.

For us mere mortals that can’t afford to purchase multiple properties in order to protect our purchasing power, there are much more affordable and divisible assets that can be accumulated over time.

Precious metals such as silver and gold have been used as stores of value for thousands of years and can be purchased fractionally or in small quantities. For example, 1oz silver coins are currently priced at £28.25 at the time of writing whilst the Royal Mint allows individuals to purchase gold digitally and fractionally from as little as £25.

Bitcoin has been the best performing asset globally over the past 5, 10 and 15 years. Within that time, it has never been hacked and its network has continued to operate and grow. It, too, can be purchased in fractions for as little as £1 at a time.

Similarly, stock market indexes such as the S&P 500 have consistently appreciated in value by approximately 10% per year over the past 100 years, helping investors preserve their purchasing power over time. Shares in the S&P 500 can also be bought fractionally for as little as £5 through brokers like Vanguard.

The above options are not exhaustive and not without risk. However, they are good examples of scarce assets that have generally appreciated against inflating currencies such as the Great British Pound and US Dollar, protecting their holder’s purchasing power over time.

It's not my place to tell anyone to save or invest in specific asset classes. Although, given the UK's increasing debt commitments, it might be worth starting to think about it.

TL;DR: The UK's national debt is at a staggering £2.7 trillion, with rising interest payments consuming 7-8% of taxpayer money, outpacing spending on key public services. The debt is expected to balloon further, reaching 274% of GDP by 2071. Defaulting or refinancing the debt are unsustainable solutions, leaving inflation as the likely tool for managing the debt burden. This devalues the pound, harming savers and driving up prices. To protect against inflation, investing in scarce assets like gold, silver, Bitcoin, or stocks may be a smart strategy to preserve purchasing power.