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Government must retain investor confidence to manage ‘eye-watering’ debt levels

19 Aug 2016
Close up of digital screen displaying financial market information

Commenting on the latest update on the health of the public sector finances, showing government debt falling as a percentage of economic output, but still standing at over £1.6 trillion, James Sproule, Chief Economist at the IoD said:

“At first glance, £1.6 trillion is an eye-wateringly large figure for government debt, equalling 83% of GDP. The good news is that, for the moment, interest on that debt is low, indicating a high degree of market confidence in the UK. The next question is whether that confidence will remain when Article 50 is triggered, and the negotiations for the UK to leave the EU begin.

“The Government certainly should do everything it can to avoid giving investors any more cause for concern. While some economists argue that we should use the current low interest rates to go on an infrastructure spending binge, in order to retain credibility ministers must be sure any projects it funds will deliver value-for-money. Selective investment in transport infrastructure, like the recently-announced Trans-Pennine tunnel, combined with a willingness to show political leadership on airports, are the types of projects which can deliver tangible returns.

“In the uncertain situation after the referendum, IoD members are willing to accept the Government loosening the purse strings a little, dropping the aim to run a budget surplus by the end of the Parliament. The new Chancellor must tread a careful course, taking confidence boosting measures on tax and infrastructure, but not letting the current account deficit balloon to the point that it spooks investors.”

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