New Year, Old Problem: Debt, Deficits and the Pound

5 min read

A new year brings new resolutions. It does not bring new arithmetic. Britain and America both enter 2025 carrying debts that would have been unthinkable a generation ago. How governments deal with those debts will shape the value of every pound and dollar you hold. That is the old problem behind the new year.

Britain's debt in numbers

UK public sector net debt stood at 98.1% of GDP at the end of November, according to the Office for National Statistics. That is a level last seen in the early 1960s. Between April and November the Government borrowed £113.2 billion, the third highest total for that period since monthly records began in 1993.

The cost of carrying that debt is now one of the largest items in the budget. The Office for Budget Responsibility expects interest on the national debt to cost £104.9 billion this financial year. That is money spent on past borrowing, not on schools, hospitals or defence.

How a government borrows

It helps to be clear about what the national debt actually is. When the Government spends more than it raises in tax, it borrows the difference. Much of that borrowing is done by selling gilts, which are bonds issued by the Government. A buyer of a gilt lends the Government money now in return for interest each year and repayment on a set date.

The interest bill depends on two things: how much is owed and the rate at which it was borrowed. Both have risen. That is why debt interest has become one of the largest items in the budget. It is also why every rise in rates is felt by the Treasury as well as by mortgage holders.

America's debt is larger still

The United States passed $36 trillion of national debt in November. In the year to September 2024 the federal government ran a deficit of $1.8 trillion. Its net interest bill reached $882 billion, more than it spent on defence.

The dollar is the world's reserve currency, which allows America to borrow on terms no other country enjoys. But that privilege rests on trust. Every year of large deficits draws a little more on it.

How governments really pay

There are only a few ways out of heavy debt. A government can raise taxes, cut spending or grow its way out. Each is hard. Raising taxes is unpopular, as October's Budget showed. Cutting spending is harder still. Growth has been weak.

That leaves the quiet option. If inflation runs a little above target for long enough, the real value of the debt shrinks. UK inflation was 2.6% in November, above the Bank of England's 2% target. Even so, the Bank cut rates twice in 2024. The Federal Reserve cut three times. Savers in cash are the ones who pay for this approach, slowly and without any announcement.

The long decline of the pound

None of this is new. The pound has lost buying power in almost every year since the Second World War. Since the last link between the world's currencies and gold was cut in 1971, there has been no anchor at all. The supply of money has been set by policy, not by anything physical.

Sometimes the loss has come in a single day. On Saturday 18 November 1967 the pound was devalued by 14%, from $2.80 to $2.40. It followed months of pressure on sterling. The Six-Day War in June closed the Suez Canal and pushed up the price of oil and other goods. The United States, by then fighting in Vietnam, was unwilling to prop up the pound again. France's President de Gaulle had just turned down Britain's renewed bid to join the Common Market. Dock and railway strikes in September widened the trade deficit and forced up Bank Rate. By early November heavy selling of sterling had made devaluation seem unavoidable, even to its strongest opponents. The next evening Harold Wilson told viewers that "the pound here in Britain, in your pocket or purse or in your bank" was worth no less than before. Official historians have since called the broadcast a damaging blunder. Every pound bought less abroad from that weekend on, which in time meant higher prices at home for anything imported.

Printing in the modern age

Central banks added to the problem after 2008. Between 2009 and 2021 the Bank of England created £895 billion of new money through quantitative easing, most of it used to buy government bonds. Every new pound diluted the ones already in circulation. Asset prices rose. Savers' cash bought less.

The scale is easy to forget. The policy began in March 2009, when Bank Rate was cut to 0.5%. Of the £895 billion, £875 billion went on gilts. Around half of all the buying took place after March 2020. By the time it ended, the Bank of England owned more than a third of all UK government debt. In effect, one arm of the state had lent to another on a vast scale.

A House of Lords committee examined the policy in 2021. It found the effect of quantitative easing on inflation "unclear", but warned that the latest round could prove more inflationary because it came alongside heavy government spending. It also warned that decisions on when to tighten policy could become politicised, since raising rates could put the Government's own plans for growth at risk. It asked the Bank to publish more of its analysis, forecasts and plans, so that the public could judge the policy for itself.

Gold shows the result more clearly than any price index. Measured in pounds, an ounce of gold now costs more than ten times what it did in 2000. The gold did not change. The pound did.

Money no one can print

Gold had its best year since 2010 in 2024, rising more than 25% in dollars and close to 28% in pounds. Gold's highest point of 2024 came on 31 October. The rise was not driven by excitement. It was driven by central banks, governments and savers looking for an asset that sits outside the debt system.

No government can print gold. No central bank can create more of it with a keystroke. Mining adds less than 2% to the world's stock each year. That scarcity is why gold has held its value over the long run while paper currencies have not.

Gold's price does still move, at times sharply, which is why it is best thought of in years and decades rather than in weeks or months.

For UK residents, Britannias and Sovereigns have a further advantage. As UK legal tender, gains on them are exempt from Capital Gains Tax for UK residents. Many customers also choose coins graded by NGC or PCGS, each sealed with its own certification number that can be checked online.

The debts will still be there next January. So will the incentive to inflate them away. Understanding that is the first step in protecting what you have built.

Speak to a specialist

If you would like to talk it through, call a specialist on 0208 064 0076, Monday to Friday, 9am to 5pm, or book a call at a time that suits you.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.