It has been reported by the BBC that the UK government has increased its borrowing from the bond markets even further in 2013. Despite the UK's huge government debt which is now equal to 75% of GDP.
The governments debt to the bond markets has been heavily increasing in the past five years (see graph). I believe that the UK government should definitely ease off the borrowing as the deficit is now becoming too large to comprehend, according Trading Economics the UK ranks 13th in the world for total to debt to GDP.
The UK's credit rating has already been downgraded this year as many investors and rating agencies are now fearing that the UK will have trouble paying back its debts in the future. This fear is starting to become apparent as the UK's growth has been almost stagnant for a number of quarters in the previous years, this means that there is little growth, with less growing businesses there will be less revenue for the government unless they increase the tax rate. But an increase in taxes will mean businesses will be less likely to grow anyway, so the government is almost "clutching at straws" with what to do with the economy.
The unemployment rate has decreased this year but it is still very high, and this is causing the government to spend even more supporting the jobless and this is causing higher tax rates for businesses.
The UK government also have to be wary of inflation, mainly the CPI index which has increased even further in the past year (see graph). The CPI index now stands at 126 points and has increased largely in the previous year, this is causing consumer confidence to decrease as less people are spending and this in turn is creating a ripple effect which is effecting many businesses.
More borrowing is a bad sign for the UK economy but if the government wants to continue funding the welfare state they will need to either borrow or increase taxes further. But they cannot increase taxes as the economy is not growing enough to accommodate it. The truth is with this stagnating economy the government can longer support the welfare state and also spend money on improving the economy without borrowing.
The public sector net debt now stands at £1.19 trillion which is the total of how much the country owes. The UK's economic outlook is not looking promising as the government will likely have to start paying higher interest on their loans, whilst still trying to fund the welfare state with an economy which is running at a trade deficit.
With increasing rates the government will likely stop borrowing and look for other sources of funding, this could be either more monetary policy or higher taxes. This is because the government can no longer the lower the bank of England's interest rate in order to inspire growth as its already at its lowest for more than 30 years.
The truth is in order to keep the welfare state running the UK will either continue borrowing or start introducing heavier taxes on business's across the UK despite the Economic impact that may cause.
Daniel Butler
References : BBC and Trading Economics :
/http://www.tradingeconomics.com/
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