“Can we find some money?” - how to approach the UK’s debt problem

Henrik Helsen
4 days ago
5 min read

Updated: 6 hours ago

In last week’s article, we set out some of the causes of rising and potentially unsustainable sovereign debt levels in many Western nations, particularly with a focus on the UK and France. For this article, we will zoom in on the UK, mainly since that is the country our readers will be most familiar with. The COVID-19 pandemic has induced an era of permanently higher government expenditures, and while debt-financed spending is certainly tempting, it cannot go on forever.

A real debt crisis could compel central banks to get involved in fiscal policy. This could occur through a direct mechanism: injecting money to finance government activities, similar to what Jeremy Corbyn proposed in the 2015 Labour Party leadership election. Alternatively, the central bank could keep interest rates lower to reduce the burden of debt repayment, at the cost of higher inflation. The consensus among mainstream economists is that none of those options are particularly desirable, to put it mildly.

Many governments, including the current one, will argue that strong economic growth will alleviate the debt burden. This is partially true: strong growth implies rising tax revenues, which will alleviate fiscal pressure. Additionally, because debt is conventionally measured as a percentage of nominal GDP, if GDP increases proportionally more than net debt, then the percentage will actually fall. This was seen very clearly in the aftermath of WW2, when the UK’s debt-to-GDP ratio fell from 270% to 50% in around thirty years, driven mostly by higher inflation and high growth, both of which will increase nominal GDP.

However, growth on its own will not be enough, especially since demographic changes mean that pressure on the public purse is only going to worsen over time. Widespread fiscal changes are almost certainly needed. But where to start?

It is worth pointing out that this article does not have anywhere near all the answers. Fiscal policy is inherently political, and governments are constrained by their desire to win the next election at the cost of more or less everything else. While there is also limited scope to go into significant detail about the economic posts, I have tried to sketch out a rough overview of what possible solutions might look like.

A large part of the UK’s fiscal problems arise from the fact that the government does not seem to have decided on its own role within the economy. It has been repeated to the point of cliché, but it is still true that the UK seems to think it can deliver Scandinavian-style public services with American tax rates . The first thing almost every undergraduate economics student learns is that “trade-offs” are the beginning, end, and most of the middle of the theory behind their subject. It is simply not possible to have everything, and the UK appears to be stuck in the worst of both worlds.

This can be illustrated with a simple example. The UK government currently funds local authorities to the tune of £142bn, which accounts for a high 5% of GDP and ten times what it spends on the entire Ministry of Justice budget. It is true that local authorities are incredibly underfunded (and to be clear, this article is not proposing austerity measures like those implemented by the Cameron ministry). Instead, local authorities could be given the means to raise more of their own funds. Properties are still taxed on their 1991 value, which has led to some incredibly disproportionate outcomes. Property prices in London have skyrocketed, and many now-multimillion pound properties that were worth one-fifth just twenty years ago, are meaningfully undertaxed.

Replacing council tax with a tax proportional to the present-day value of homes would be less regressive and raise more revenue. Combined with the abolition of Stamp Duty (which distorts labour mobility by discouraging new house purchases), this could represent a serious step towards reducing local government dependency on Westminster funding. An alternative suggestion would be taxing the value of underlying land (instead of buildings). This would have similar effects, while also encouraging further property development, because developers would not have to fear their assets being dragged into higher “bands”.

There is no hiding from the fact that entitlement spending probably needs reform. In particular, pensions are currently a huge drain on public finances across the OECD, where 19% of the population is currently over 65. Pensioners in 2025, composed of the Baby Boomers, are factually the wealthiest generation in all of human history. More so than any other generation, they have reaped the benefits of the postwar economic order for their entire lives.

In the UK, the “triple lock” pension scheme (where state pensions increase by the highest of 2.5%, average earnings growth, or the Consumer Price Index) is projected to cost £15.5bn by 2030, three times as much as previously thought. Abolishing the triple lock would be politically unpopular, but by cutting on pension payments to the wealthiest generation, and putting this elsewhere, it would lead to a redistribution of intergenerational wealth.

This redistribution could also have other economic benefits. In contrast to what life-cycle consumption theories would tell us, empirical data shows that pensioners save more than young people. The reasons for this are unclear but may have to do with the fact that older people want to pass a large inheritance to their children. However, this merely entrenches existing inequalities, given that wealthier pensioners will also tend to have wealthier children.

There is much this article has not touched on. The UK fiscal framework has many other fiscal peculiarities. Income tax is a particularly notable example, where earners making between £100,000 and £125,140 face an effective marginal tax rate of 60% as the personal allowance is removed, which is higher than earners above the upper bound.

Ultimately, the biggest obstacle to meaningful fiscal reform will still be political myopia. It has become somewhat more fashionable in recent years to talk about “hard choices”. It is probably fair to say that the time has come to turn that talk into action.

The views and opinions expressed in this article belong solely to the writer and do not necessarily reflect the views and opinions of the Warwick Economics Summit.

Reference list

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Cooney, Francesca, Greg Oxley, Louise McNair, Sally Lipscombe, and Shadi Danechi. “Estimates Day: The Spending of the Ministry of Justice.” House of Commons Library, August 21, 2025. https://commonslibrary.parliament.uk/research-briefings/cdp-2025-0138/.

Elliott, Larry. “Is Jeremy Corbyn’s Policy of ‘Quantitative Easing for People’ Feasible?” the Guardian, August 14, 2015. https://www.theguardian.com/business/2015/aug/14/is-jeremy-corbyns-policy-of-quantitative-easing-for-people-feasible.

GOV.UK. “Local Authority Revenue Expenditure and Financing: 2025-26 Budget, England,” June 19, 2025. https://www.gov.uk/government/statistics/local-authority-revenue-expenditure-and-financing-england-2025-to-2026-budget/local-authority-revenue-expenditure-and-financing-2025-26-budget-england.

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