Economic Environment: Debt bombshell

UK National Debt Clock - DebtBombshell

We’re going to post up a series of blogs over the coming months that have a specific focus on the economic environment that firms are operating in. It’s been a while since the economy tipped from a “credit crunch” in 2008 into its worse recession since the 1930s. As the UK stumbles into the early stages of a recovery, it’s time to take a series of glimpses into what this means for business.

We’ll start by taking a look at debt. After all, the recession began after the banking sector went into crisis, weighed down by bad debts and uncertainty. And the main economic debate in the UK at the moment is about the debt that the UK government is in: and what should be done about it.

This debt (presented to you here in a deliberately scary ‘this is what you owe’ format) has arisen because over time - and especially over the last couple of years - the government has spent more money than it raises in taxes. The government has no money of its own, so this deficit has to be funded just like a business: by taking on debt. And the UK government is little different from any commercial enterprise in that it has to pay interest on the debt, giving extra urgency for the need to pay it back. That can only happen if spending is cut and/or taxes rise.

That’s the quick conclusion of this first entry: firms and households can expect that between now and 2016 (when extra borrowing is forecast to come to an end - and debt repayment becomes feasible) taxes will rise and government spending will fall (the balance is supposed to be around 25% of the pain coming from tax increases, 75% from lower spending). The government is a major customer for many businesses, who will feel a real pinch in the years ahead. The effect of tax rises on firms and households will be one to watch too.