UK's Borrowing Binge: Is This Debt a Disaster or a Necessity?
10min read The UK’s public sector borrowing in March 2025 hit £16.44 billion, marking the third-highest monthly figure in 30 years and shattering pre-pandemic norms. This staggering number isn’t just a blip—it’s part of a fiscal storm that’s been building for over a decade. Let’s dig into what this means for investors, and whether there’s a silver lining in this cloud of red ink.
The Historical Context: Pandemic vs. Present
The March 2025 borrowing is dwarfed only by the £19.1 billion recorded in February 2021—the pandemic peak—and the £29.3 billion borrowed in September 2020. But here’s the catch: the fiscal year 2025 total of £151.9 billion is now the third-highest since 1947, trailing only the pandemic’s £300.3 billion and the 2010 financial crisis’s £157.7 billion. This isn’t just about temporary spending—it’s a structural problem.
Why the Borrowing Won’t Stop
The numbers scream urgency. Public sector net debt now sits at 95.5% of GDP, a level not seen since the 1960s. But why can’t the UK kick its borrowing habit? Three culprits stand out:
Inflation’s Hidden Tax: Rising prices mean the government is paying more for everything—from healthcare to teacher salaries. Even if revenues grow, expenses are outpacing them. Debt interest alone cost £80.8 billion in the 11 months to February 2025, a 12% jump from the previous year.
The Pay and Benefit Spiral: Public sector pay hikes and benefit adjustments (to keep up with inflation) are eating budgets. The current budget deficit for the year to March 2025 hit £74.6 billion, £13.9 billion worse than expected.
Post-Pandemic Hangover: While pandemic-era schemes like the furlough program have wound down, their legacy lingers. The ONS notes that even revised February 2025 borrowing figures (up to £12.31 billion) reflect lingering local government debt.
What’s an Investor to Do?
This isn’t just a UK problem—it’s a global theme. High debt loads force governments to choose: raise taxes, slash spending, or let inflation erode obligations. For investors, here’s the playbook:
1. Beware the Bond Market
The gilt market (UK government bonds) could face a reckoning. If the Bank of England hikes rates to curb inflation, bond prices will plummet. The 10-year Gilt yield has already risen from 1.5% in 2020 to over 4% in 2023. Investors in long-term bonds are sitting ducks.
2. Infrastructure Plays
The government can’t cut infrastructure spending—it’s a lifeline for growth. Look at companies like BAM Construction (part of ACS Group) or Costain, which are tied to projects like HS2. The FTSE 250 Construction Index has outperformed the broader market by 15% over the past year.
3. Inflation Hedges
Gold, commodities, and energy stocks (e.g., BP or Shell) act as buffers against inflation. The London Gold Fixing rose 18% in 2022 alone, and energy giants have thrived in a high-rate environment.
4. Avoid the “Safe” Sectors
Utilities and telecoms, once seen as stable, could face regulatory pressure. The UK’s National Grid and BT Group have underperformed the FTSE 100 by 20% since 2020 as governments prioritize affordability over profits.
The Bottom Line: Debt is a Trap, but Investors Can Still Win
The UK’s borrowing binge isn’t a disaster—it’s a new normal. With debt at 95.5% of GDP, the government is stuck between a rock and a hard place. But investors can profit by focusing on inflation-resistant assets, infrastructure plays, and steering clear of over-leveraged sectors. The key is to remember: when governments borrow, someone pays. Make sure it’s not your portfolio.
In closing, the UK’s fiscal path is clear: borrowing will remain elevated. But with smart picks in construction, commodities, and tech, investors can turn this fiscal storm into a golden opportunity. Stay aggressive, stay focused—and never underestimate the power of a government in debt.
