In 2023–24, the United Kingdom experienced high inflation, driving up the cost of index-linked government bonds (gilts). While nominal tax receipts increased due to fiscal drag, long-term projections point towards rising structural deficits. The pressure comes from an aging population demanding higher healthcare (NHS) and state pension expenditures, alongside critical commitments to defence spending and the Net Zero carbon transition by 2050.
Historically, the UK enjoyed low borrowing rates, with 10-year gilt yields averaging below 1.5% in the late 2010s. However, monetary tightening has pushed these yields above 4.5%. Debt-servicing costs now exceed £100 billion annually, absorbing a significant portion of tax revenues.
Proponents of fiscal consolidation argue that high public debt (approaching 100% of GDP) crowds out private investment, threatens sovereign credit ratings, and places an unfair tax burden on future generations. Conversely, Keynesian advocates argue that borrowing is essential to finance the UK's productivity-enhancing green infrastructure projects, and that premature fiscal austerity would lock the UK into low-growth stagnation.
Extract C states: "Proponents of fiscal consolidation argue that high public debt... crowds out private investment... Conversely, Keynesian advocates argue that borrowing is essential to finance productivity-enhancing... infrastructure."
Using the data in the extracts and your knowledge of economics, evaluate the view that a significant increase in a country's national debt is inevitably damaging to its macroeconomic performance.