The UK’s Debt Dilemma: Short-Term Pressures, Long-Term Risks

By Daniel Sung, Sungjin Choi 

With a nominal GDP of nearly $3.8 trillion, Britain consistently ranks among the top six economies globally, shaping financial markets and trade flows far beyond its shores. The United Kingdom’s economy remains one of the most influential in the world, and what happens in Britain does not stay in Britain.

Today, the world’s eyes are fixed on a growing storm within this heavyweight economy: its escalating debt crisis. Public sector net debt has climbed to £2.8 trillion, or roughly 97% of GDP, according to a report published in July 2025 by the Office for Budget Responsibility. Interest payments alone are surging, driven in part by inflation-linked bonds, with some months topping £16 billion. 

The Office for Budget Responsibility warns that, on its current path, UK debt could triple to nearly 275% of GDP by the 2070s. Investors have already taken notice that gilt yields, the interest rate on UK government bonds, remain elevated, signalling higher borrowing costs compared to other G7 nations. 

The rise of credit cards and contactless payments has reshaped how Britons spend. Cash transactions have dwindled to under 20 percent of all payments, while contactless cards now account for more than a third. However, economists warn that this frictionless spending carries hidden risks.

Research by MIT and subsequent studies show that paying with a card can double a consumer’s willingness to pay compared with cash, as it mutes the “pain of paying.” In Britain, the Financial Conduct Authority reports that around 5% of adults—nearly 3 million people—pay more in interest and fees than they reduce in credit card balances. Credit card borrowing is rising at over 10% year-on-year, according to the Bank of England.

While personal debt is not the same as public debt, household fragility can spill over to the public sector. In downturns, governments often step in with support, further adding tension to the state’s already stretched finances.

Brexit, too, continues to weigh on the UK’s economic trajectory. Studies by the Centre for European Reform estimate that the size of Britain’s economy is about 5% smaller than it would have been had the country stayed in the EU, with investment down nearly 14% and goods trade reduced by 13%.

The OBR has long assumed that Brexit permanently lowers productivity by roughly 4%, shrinking the tax base. That makes every pound of spending harder to finance. Markets have noticed: UK gilt yields remain higher than those of other G7 nations, reflecting investor concern about Britain’s fiscal outlook.

The fallout was evident during the 2022 mini-budget crisis, when gilt yields spiked and pension funds wobbled, forcing the Bank of England into emergency intervention. The episode underscored how Brexit’s political and economic consequences have amplified Britain’s vulnerability to market shocks.

Another driver of the debt spiral is the very model of Britain’s welfare state. The National Health Service (NHS) is often described as the “jewel in the crown,” but it is also an increasingly expensive one. Healthcare spending in England exceeded £200 billion in 2024 and 2025 and is projected to rise steadily to £247 billion by 2028 or 2029.

Yet service quality remains under strain. Waiting lists hover at 7.4 million people, while just 76% of patients are seen within four hours at A&E—far below the 95% target once standard across the NHS. Internationally, the UK performs near or above OECD averages on many outcomes, but public frustration over access is growing.

According to the OBR, health and social care costs will rise from 7.6% of current GDP to 14.5% by 2074, making them the single largest long-term driver of public debt. In short: what feels “free” to patients is becoming increasingly unaffordable to the Treasury.