The British national debt is the total sum of money the government has borrowed over time from creditors due to spending more than it earns, with the majority accumulated during wars.
With the debt growing steadily since the practice began during the reign of King William III, between 1689 and 1702, you could be forgiven for thinking it will never be paid back.
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On the contrary, in 2006, the UK finally paid off the last of its World War II debts to Canada and the United States. Then, in 2015, the remaining British debt from World War I was also repaid.
Currently, the UK country debt stands at an all-time high of £2.8 trillion, with the impact of the Covid-19 pandemic between 2019 and 2021 lingering on. The money is borrowed on the strength of securities such as bonds, notes and bills.
Britain isn’t alone in having a large national debt, as other countries are in the same situation. However, with the current UK debt being so high, some financial experts believe it will never be paid off in full.
National debt history
King William III met with a syndicate of merchants and city traders to discuss bailing out the government to aid England’s war with France.
The conflict began in 1689, due to France and England having captured overseas territories in the Caribbean, India, America and Africa. Each nation fought to expand its empire, with lucrative trade routes at stake, including sugar from the West Indies.
Battles were fought at sea, with the cost of warships exceeding the nation’s available finances. Continuing until 1697, the War of the Grand Alliance cost the British treasury £1.6 billion, leaving a shortfall of £850 million, hence King William asked the syndicate to “buy” the debt. The syndicate formed the Bank of England on 1st August 1694 to operate as a private banker to the government.
France and Britain remained at war until 18th June 1815, when French troops were finally defeated at the decisive Battle of Waterloo. By this time, Britain’s national debt had increased to £1 billion – more than 200% of the country’s Gross Domestic Product.
World War I debt increase
During the 19th century, the government managed to pay off some of the debt gradually, but it increased again dramatically during WW1.
At the start of the conflict in 1914, the national debt was £650 million, but the government had to borrow heavily to sustain the war effort. By the end of the fighting in 1918, the UK debt had grown significantly to £7.4 billion, its highest level in history.
The majority of government borrowing was done through bonds, which came with a promise that the money would be repaid in the future. Regular interest payments had to be made during the lifespan of the bond.
It took the government around a century to pay back the WW1 debt in full. In December 2014, the then Chancellor, George Osborne, announced the government would repay the outstanding £1.9 billion from a 3.5% War Loan on 9th March 2015.
Financial analysts said the Treasury was taking advantage of low interest rates to refinance the debt with new bonds to save an estimated £30 million annually in interest payments. Making the announcement, the Chancellor said the repayment was a sign of the government’s “fiscal credibility” and a “fitting way to remember that extraordinary sacrifice of the past”.
World War II debt
At the outbreak of WW2 in 1939, the UK’s national debt was £8.1 billion, equating to 135% of the GDP, an increase of £1.3 billion compared with 1938. The most expensive war in history, the national debt peaked at £21 billion by 1945, representing 270% of the GDP.
The sum of £3.4 billion was owed overseas, the majority to US creditors through the Lend Lease Act. The rearmament programme just before the war had cost £197 million, while expenses continued to rise throughout the conflict.
Conscription and training of men aged 18 to 41 through the National Service Act of 1939 was one of the biggest costs. Just two decades after WW1 ended, the nation had to rebuild a large military and industrial capacity again. The government found itself in a difficult position when the debt from WW1 was crossing over into WW2.
Costs included hosting governments-in-exile in London, which became a hub for European officials from Greece, Belgium, Czechoslovakia, the Netherlands, Poland, Luxembourg, Yugoslavia, Norway and the Free French movement.
Coordinating military efforts with the US also made a dent in Britain’s finances, as did increasing food production and making munitions, even when voluntary labour was used.
The UK offered the US various “perks” in return for borrowing money, such as providing long-term leases for American bases in overseas territories and giving the US armed forces preferential access to telecommunications networks and civil aviation routes.
Money was spent on transporting around 3.5 million evacuees, the majority of whom were children, from British cities to safer areas to stay with host families during Operation Pied Piper, which started in 1939.
Towards the end of the war, in 1944/45, 80% of the UK’s total spending was on defence following the disastrous bombings that had destroyed many cities, including London.
Post-war repayments
During the next three decades after the war, the UK government continued to pay back the debt and the ratio fell to around 50% of the GDP. However, the repayments weren’t made steadily, as the UK government suspended them in 1956, 1957, 1964, 1965, 1968 and 1976, due to unfavourable exchange rates.
By 2002, the national debt had decreased to 29% of the UK’s GDP. The final repayments of WW2 overseas borrowing were made six years late, on 29th December 2006, when the British government paid £64 million to the US and £18.2 million to Canada.
Government debt UK today
Ask an economist how much debt the UK is in today and you may be shocked to learn it equates to roughly £37,900 per person, although of course it’s owed by the government and not by individual citizens.
Around one-third of the national debt is owned by the Bank of England. The total sum of all the government’s outstanding debts is now more than double what it was before the economic slump of 2008.
However, it remains relatively low compared with the national debts of other nations, such as Japan, where the debt-to-GDP ratio stands at 251.9%. The current UK debt equates to 100% of the GDP, as of the end of August 2024.
The government borrows various amounts from investors to finance budget deficits in the form of bonds, which are sold via the UK Debt Management Office. Deemed a safe investment, they’re backed by the government’s credit.
Banks, investment funds, pension funds and insurance companies are the main buyers of bonds. The public are also invited to invest in National Savings & Investment products, including Premium Bonds.
