Rising debt burdens Britain and the US
Tax rises in the Autumn are "starting to feel inevitable" warned Capital Economics today after the UK government borrowed more than expected last month, making Rachel Reeves’s unenviable task to balance the books that bit harder.
According to the ONS, government borrowing (the difference between spending and tax income) rose to £20.2bn in April, considerably higher than the £17.9bn forecast and £1bn more than during the same month a year earlier.
These new figures pile further pressure on the Chancellor. Downgraded growth forecasts over the next few months are already expected to hit tax receipts while spending pressures have increased thanks to government promises to spend more on defence and reinstate some pensioners’ winter fuel payments.
Reeves set herself quite the challenge when she vowed to get debt falling as a share of national income by the end of this parliament.
Today’s higher-than-expected UK borrowing figures come at a troubling moment too because global bond markets are already jittery about the rising debt burdens of countries across the world, particularly the US.
Today, US Congress narrowly approved a new federal budget that will raise US government borrowing yet again.
This “big, beautiful bill… arguably the most significant piece of Legislation that will ever be signed in the History of our Country!”, according to (you guessed it) the US President, is primarily a package of tax cuts.
It will renew Trump’s 2017 tax cuts which would otherwise lapse and it will remove tax on tips and overtime income. It will also increase spending on border security.
Republicans have sought to reduce the price tag of the bill by making social welfare cuts - namely, slashing nearly $800bn from Medicaid, the US healthcare scheme for those on low incomes, and making cuts to food stamps.
Hence why Hakeem Jeffries, the minority leader of the House, denounced it as “one big ugly bill” that would deprive at least 13.7mn people of their healthcare insurance and “take food out of the mouths of children, disabled Americans, veterans and older Americans”.
Yet even these controversial spending cuts will only partially offset the substantial costs of Trump’s tax cuts, meaning the bill will also be funded by increased government borrowing.
America’s stock of debt is on a sharply rising path. The ratio of debt to GDP stands at 100% today, up from just 35% in 2007. And, according to the CBO, Trump’s “big, beautiful bill” could take debt to 134% of GDP by 2034.
As Ian Stewart pointed out recently in Reaction, the US federal government has been on a multi-decade borrowing binge. In only four of the last 40 years, all of them in the second Clinton administration in the late 1990s, has the US run a budget surplus.
Fears that US debt is on an unsustainable path were reinforced last week by the decision of ratings agency Moody’s to strip the US of its highest triple-A credit rating over concerns about its widening budget deficit.
This, alongside anticipation of the new federal budget, has prompted a sell-off in US government bonds in recent days, with yields on 30-year Treasury bonds reaching 5.089 per cent yesterday, their highest level since October 2023.
Today, following the passage of Trump’s bill, the yield on 30-year US Treasuries climbed again to 5.14 per cent.
Higher bond yields mean the government has to pay more to cover the interest on nearly $29 trillion in debt.
It’s something of a vicious cycle. Rising debt servicing costs result in larger deficits, more borrowing and in turn a heavier debt burden.
What’s more, in the recent past, ultra-low interest rates made a rising debt burden more manageable. That’s changed. Interest rates aren’t expected to return to their pre-pandemic lows, making it trickier to manage debt.
Might Reeves take some comfort in the fact Britain isn’t alone in struggling to reduce government borrowing or get its national debt burden down? Unfortunately, if anything, it makes life harder for her. If heightened fears about America’s budget deficit disturbs the global bond market, then the cost of servicing debt could rise too in Britain.
Caitlin Allen
Deputy Editor
ON REACTION TODAY
Gerald Warner
The treatment of Lucy Connolly shows free speech is lost in Britain
James Rose
Pakistan may struggle to manage its “youth bulge”
ALSO KNOW
Two Israeli officials killed in Washington DC shooting - Two Israeli embassy staff, a couple named Sarah Lynn Milgrim and Yaron Lischinsky, have been shot dead after leaving an event at the Capital Jewish Museum in Washington DC. The suspect, Elias Rodriguez, is a 30-year-old from Chicago was not on any security watchlists. Police say he shouted "free Palestine" after being taken into custody.
Chaos Islands deal agreed between UK and Mauritius - The UK has signed a £3.4 billion deal to cede sovereignty over the Chagos Islands to Mauritius, Keir Starmer told a press conference on Thursday. As a “legal necessity”, Britain will lease the largest Island, Diego Garcia, for 99 years to operate a joint US-UK military base. The agreement was backed by the US, Canada, Australia and New Zealand.
UK net migration halved in 2024 - New data from the ONS shows that net migration fell by nearly 50 per cent last year compared to the previous year. An estimated 431,000 more people arrived in the UK than left in 2024, compared with the 860,000 increase in 2023. Changes brought in under Rishi Sunak’s Conservative government are thought to have largely driven the decrease as the number of individuals coming to work and study in Britain fell.
UK prison reforms to tackle overcrowding - Sex offenders could receive chemical castration to suppress sexual drive as part of plans to end overcrowding in jails, with a pilot scheme set to be rolled out to 20 prisons across England. Justice Secretary Shabana Mahmood said the government is exploring whether it will be mandatory or not. Proposed prison reforms would also allow offenders who behave well in prison to serve a third of their sentence.
FIVE THINGS
How Israel tries to shield its diplomats from attack, in The FT
Collin Meisel and Mathew Burrows in War On The Rocks: Russia can afford to take a beating in Ukraine.
Jenny McCartney in Engelsberg Ideas on the high price of Trump’s energy.
10 New AI Challenges - and how to meet them. Bhaskar Chakravorti in Foreign Policy.