Can the UK actually go 'bankrupt' and if so what happens?

[HeMadeMeSwoon]

Lots of threads at the moment about budgets, tax rises, changes to pensions, benefit cuts etc.

Without getting into the detail of what should be raised or cut can the UK ACTUALLY go bankrupt?

My understanding is that because we have our own currency we technically can't as we can just print more money. However this leads to it's own set of problems and is not really desirable. (Also if we can do this then why did we need an IMF bailout in the seventies?)

So if RR and KS do their budget but just tinker about with it and do nothing radical then what will happen.

I mean they might raise a bit of extra cash on some things but if they keep spending the way they are then without substantial extra cash coming in via taxes or growth, the debt will keep getting bigger.

There just seems to be lots of things all coming together to create a big 'bang' at the moment. Taxes seem to be almost maxed at or even falling. They seem to have stalled growth with some of the things they did last year (lots of threads giving the impression jobs are hard to come by just now). Costs seem to be going up and up. Last but not least the worse the situation gets the worse our interest seems to get (on bonds).

So what would happen if next month they couldn't borrow enough to make it all work. I mean isn't it a terribly risky way to run a country being reliant on having to borrow each month to pay your bills.

We all seem to think the idea of having no NHS or welfare state is unthinkable. Britain used to operate just like this. If you could pay you got a doctor, if you couldn't you didn't. If you were so poor you couldn't survive and had nobody to help you went to the workhouse (my mum was born at start of WW2 and used to talk about this).

Surely if we keep going till it blows up this is exactly what we are going back to?

There are lots of threads arguing about which benefits should be cut or which taxes should be raised but since we all seem to be agreed that RR/KS aren't capable of fixing things then what happens when it goes bang?

Do we get an IMF bailout with conditions imposed (so NHS, welfare all slashed?) or do we print more money (in which case why didn't we do this in the seventies when we got the last IMF bailout?). Presumably printing money signals huge problems in the UK which in turn makes our bonds harder to sell and more interest on them. Surely investors would just stop buying them?

Please no arguing about disabled children in the gutter or pensioners freezing to death.

Just at the highest level what actually happens?

(Thread inspired by watching podcast with someone high up in IMF who was saying debt to GDP concerning and alot of things that sounded worrying)

In the past we sold off industries and got cash inflow. We sold off gold and got cash inflow. We printed money and got cash inflow. It does seem however the world is watching the UK at the moment quite carefully and alot hinges on the budget and I don't think we have anything left to sell now do we?

So at the very top, the UK as a whole, what happens?

Appreciate your honestly. I don't know the answers either. The fact they are having such a late budget this year makes me think they are scrabbling around trying to pull some rabbits from hats.

I guess we just need to wait and see how it plays out.

I kind of feel lots of people are getting tied up worrying about which benefits will be cut or which taxes will go up but nobody is looking at the whole picture. (obviously you would hope RR/KS are looking at the whole picture but I really don't have much confidence in either of them ...)

actually I think the boiled frog analogy is really fitting.

Things are just going down bit by bit and so we are not shocked or horrified just getting used to it gradually.

I can't lie I have stocked up a few tins in case it all goes horribly wrong after the budget. I feel silly for even saying that but after all the shortages in 2022 I no longer trust that I can buy things when I need them. Obviously I hope that stays true but if not......

Ok.

so, I’m going to use an analogy. It’s not completely accurate but it’s good enough to get ideas across.

think of the U.K. as like a household.

gdp (gross domestic product) is like how much the household has coming in each year.

so say a household earns 30k a year.

the household has debts. They owe people money.

most households do have debts. They owe people money either on a mortgage, or on car payments, most have some type of credit card debt as well.

The U.K. currently has debt of about 98% of gdp.
https://tradingeconomics.com/united-kingdom/government-debt-to-gdp

so in household terms, you have a household earning 30k a year with a debt of 30k.

many households have debts of much much more than that, especially if you look at mortgages. Many households owe three or four times their salary on their house.

now, households only go bankrupt if they can’t make the repayments on the debt. So if you have a mortgage, and you have a job and the money keeps coming in you are fine. The problems come if you lose your job and suddenly you can’t pay your mortgage.

in those circumstances there are basically two things that can happen.

one, you come to an arrangement with the people you owe money to. So you ring up the mortgage company and they let you have a repayment holiday. Or you enter into an IVA.

https://www.gov.uk/options-for-dealing-with-your-debts/individual-voluntary-arrangements

only if you cannot reach an agreement with the people you owe money to would you go bankrupt.

the same applies to countries. Say you suddenly have no money coming in (or more likely there is a war or a plague and you need to keep paying benefits but have no tax coming in).

you can speak to the people you owe money to and negotiate a payment holiday. You could borrow money from other countries to keep paying your debt while you sort out your situation.

you’d only go bankrupt if all the negotiations failed.

going bankrupt is the very last step in a long process. The U.K. is nowhere near even the start of that process.

it isn’t going to happen in the next few years.

The USA 'bailed us out' after immediately after WW2, which we needed at the time. but it was a loan, not a gift, and we only finished paying them back less than 20 years ago.
Anglo-American loan - Wikipedia

We are also not alone. Many countries currently have high debts, including a lot of G7. Japans debt to GDP is high, as is the US, France, Italy. Greece if course, Ukraine......

I often wonder if all these countries owe massive debts, who is actually lending?? It's surely just a big ponzi scheme.

We'd just have to fall back on the gold reserves in the Bank of England vaults (yes - actual gold bars, quite a big pile of them) and hope the price of gold doesn't crash as well.

The government was paying everybody's wages whilst getting nothing in by way of income tax.

The government didn't pay everyone's wages because plenty still worked. Some people on furlough also paid tax

So back in 2008 I remember the goverment printing money and buying back its own bonds.

We never actually recovered from 08

it isn’t going to happen in the next few years.

Agree

sounds unlikely given France has a worse credit score than us! Germany maybe, which would be ironic given the situation 100 years ago...

That debt is traded. Some countries have too much money eg Gulf States and Norway. They are Sovereign economies. They can afford to buy that debt. Really it's smoke and mirrors and I suspect a few making a great deal

The UK is paying the interest on it's debt, but couldn't afford to pay it back, so in many ways I would say we are bankrupt, but that would go double for the USA. It's like just paying the minimum on your credit card every month and the debt continually rising. If our creditor's lost confidence and called in the debt we would be in trouble.

China

If you have a pension in any kind of lifestyle fund, you own some Govt. Debt.
Gilts are basically an IOU that pays out yearly interest and repays the capital sum on maturity.
China owns Billions in UK Gilts and US T Bills, that scares me more than the potential of UK ltd. going bust.

We could have gone the way of Norway, who have a Sovereign Wealth fund worth trillions, but No, our assets were sold off to foreign corporations.

I’m sure Qatar would buy us out if needed 🙄

It is almost impossible for the U.K. to go bankrupt.

Nearly all U.K. debt is denominated in GBP and the BOE can print GBP at will to pay debt off. Also 70% of gilts are domestically owned, which means that the majority of the debt represents the private sector lending the government money.

Having said that, if the BOE were forced to print a lot of money, inflation would spiral, so it would prefer to avoid that and, in extremis, may choose some kind of insolvency in preference.

We are a long long way off that now and still rated Aa- or equivalent by the rating agencies, which is high investment grade.

But confidence is quite fragile, so Reeves does need to be mindful of that in her budget.