Is Britain Heading for Another Debt Crisis?

 

The NY Times reported yesterday that Britain Raises Taxes by More Than $30 Billion in Push for ‘Stable Economy’. What is meant by "Stability" in this context is the prevention of yet another Debt Crisis. From the perspective of Systems Theory, all the handwringing raises the questions of (1) What is a Debt Crisis? (2) Can we measure it? (3) Can we define "Debt Crisis Stability" a little more precisely? And, (4) Should something be done about it?

Modern Monetary Theory (MMT) argues that for a Country that issues it's own currency (Britain does and it is the Pound Sterling) Debt is never a problem because the country can always print more money if there are slack resources (unemployment, excess capacity, etc.) in the economy. From the perspective of Systems Theory  whether or not Debt is an economic issues is not as important as whether it acts as an historical controller. A simple controller model would be (DEBT-Q) where Q=The Economy and DEBT= (Revenue-Expenses). In other words, does the Political System monitor the controller and then do something about deviations.

The simple controller can be expanded to include a number of other measures (see the Debt Crisis Indicators in the Notes below with series taken from the World Development Indicators).

When DEBT1 = DEBT-GDP (explaining 60% of the variation in the indicators, see the Debt Crisis Measurement Model below) is plotted over time, the first half of the graphic at the beginning of the article (up to 2015) is displayed. There are a number of spikes in the graph: (1) The Iran-Iraq War (1980s), (2) The 1990s Recession and (3) COVID-19 Pandemic. Each of these events produced a Debt-Crisis, as captured by the DEBT1 index.

Britain withdrew from the European Union (Brexit) in January 2020. Since Britain never adopted the EU Currency (the Euro), from the standpoint of MMT, Brexit should have been a non-event. From the standpoint of Geopolitics, however, Britain had to seek new Alignments and the choices were basically to go it alone (BAU), the US, the World System (W) or return to the EU. The potential effects on DEBT1 are forecast in the graphic above after 2020.

The BAU model (no alignment) and returning to the EU are not much better than a Random Walk (RW, muddling through) and would have kept DEBT1 at current high levels. Alignment with the World System (W) or the US would have resulted in large secular declines in DEBT1 (to historically low, unrealistic levels by 2060).

Exactly what level of DEBT1 would reduce the handwringing in Britain is not clear. What we can ask is what the effects of DEBT1 on the UK Economy (UKLM Model) would be. The best model would be a Random Walk (see AIC Statistics Effects of DEBT1 below). The effects of DEBT1 on the System states (see Effects of DEBT1 on UK_SYS model) would be minimal and best described by Random Error.

Is Britain heading for a Debt Crisis? Since Debt Shocks are random events and since the response to the (Q-DEBT1) controller is a Random Walk, continued muddling through is the most reasonable forecast. If DEBT1 stabilized at current levels, would that be too high? As long as the Government can continue responding the (DEBT-GDP), the Deficit is under control. Is DEBT1 creating Instability? If we define Instability by shocks (World Market Shocks, Recessions, Pandemics, etc.) and if DEBT1 returns to trend after the shocks, the Political System is functioning appropriately. The basic process of responding to the (DEBT-GDP) controller is systemically stable (see the System's models below).

One interesting question is how the Debt Controller would function if the British Economy reached a Steady State. How high a level of debt would be tolerable and would the Debt Controller operate in the same way? You can experiment yourself with the UKLM Model and see whether you think the model is approaching a  Steady State. 

Notes

More background:

• Blog Roll: The United Kingdom (1950-2000+)
• Boiler Plate For information on data sources, how the models were constructed and general Historial Controllers.

Handwringing:

• What Would it Take to Stabilize UK Debt -- Goldman-Sachs
• Beyond the UK Budget: The Global Debt Crisis We Should Worry About
• What is the UK Debt Emergency -- YouTube.
• Britain is Slowly Going Bust -- The Economist.
• How much money does the UK government borrow, and does it matter? BBC
• Economy alert: UK debt to smash £3.5TRILLION as borrowing costs sky rocket - GBNews 
• Might the UK really need a 1970s-style IMF bailout?
• How did COVID affect government revenues, spending, borrowing and debt?
• Debt and austerity remain risk for UK government after tax-raising Budget -- Financial Times

Debt Crisis Indicators

Debt Crisis Measurement Model

DEBT1 = DEBT-GDP, DEBT2 = GDP-G, and DEBT3 = Q+G-TAX

Debt Crisis Models

AIC Statistics Debt Crisis

AIC Statistics Effects of DEBT1

Effects of DEBT1 on UK_SYS model

Compare the System matrix to the UK_LM model here (they are very similar).

Google AI

The UK faces a debt crisis driven by both high public and personal debt, with the national debt exceeding 100%of GDP and millions of households struggling to cover basic expenses due to rising costs and stagnant wages. This is a result of factors like the cost-of-living crisis, which has led to a sharp rise in personal debts such as council tax and energy bills, and government borrowing during events like the pandemic. The situation is exacerbated by factors such as high borrowing costs, a challenging fiscal outlook, and a need for significant consolidation steps, according to Goldman Sachs.

Public debt

• High debt-to-GDP ratio:The UK's public debt is high, currently at 101%of GDP, which is historically high outside of major wars.
• Contributing factors:Government spending on measures like the Coronavirus Job Retention Scheme ("furlough scheme") significantly increased the national debt.
• Fiscal outlook:The deficit was 5.7%of GDP in 2024, the third-highest in Europe, and high borrowing costs make the fiscal outlook challenging.
• Path to stabilization:Stabilizing the debt will require significant consolidation steps and achieving a primary surplus, which the UK has not done since the early 2000s.

Personal debt crisis

• Soaring council tax debt:Outstanding council tax debt has surged, with over four million people now behind on payments, notes Debt Justice.
• Struggling households:Millions of people are in debt due to the cost-of-living crisis, unable to cover essential costs like rent, energy, and food without borrowing.
• Causes:This is not due to irresponsibility but is a result of economic pressures like frozen wages and rising costs, with public spending cuts forcing households to rely on private debt to make ends meet, says Debt Justice.
• Consequences:The crisis leads to anxiety, exhaustion, and a loss of dignity, and contributes to rising homelessness.

Broader economic context

• Recession:The UK entered a recession partly due to people cutting back on spending, highlighting the impact of economic pressures on households.
• Inflation:High inflation makes it harder for the Bank of England to lower interest rates, which can further strain government finances and household budgets.
• Policy:The government's withdrawal of support is seen as a key driver of the household debt crisis, as private debt fills the gap where public spending should be, argues this YouTube video.