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The debt of nations

Over the past century, many governments have become increasingly dependent on borrowing to finance public spending. In the last two decades alone there has been a dramatic increase in borrowing by governments to nearly £30 trillion, more than three times the level of public debt in 2001.

Borrowing can be a valuable tool to finance capital investment, for example in infrastructure, which creates economic and social benefits. However, increasingly governments in developed countries are borrowing to pay day to day running costs. With aging populations, this is not something that is likely to be sustainable over the long term. Especially where growth in borrowing exceeds growth in the economy.

With the era of ultra-low interest rates coming to an end, the reversal of quantitative easing and interest rates beginning to rise, there are real questions about whether governments will be able to afford the cost of their debts.

Traditionally governments have sought to inflate away their debts, hoping that inflation will mean historic debts fall relative to the size of the economy. This policy choice comes at a cost however, eroding the value of saving and investments in the domestic currency and may be harder to implement in an era where central banks are mandated to keep inflation low.

Our “debt of nations” policy insight explores these issues and provides a range of analysis and reflections on borrowing by government. In particular the difficulty of comparing the level of debt between countries and the risks being built up in government in balance sheets.

ICAEW believes we need a better public understanding of how public debt is measured and managed to know whether borrowing by government is truly under control and our economies will be resilient in the face of future economic crises.