24th August 2026
Most of us have been brought up to think about debt in a very simple way.
If you borrow money, you owe somebody that money. Eventually it has to be repaid, and until it is repaid you pay interest on it.
So when we hear that Britain's national debt is approaching £3 trillion, it is perfectly natural to imagine the Government sitting under a mountain of bills which eventually have to be paid.
But economist Richard Murphy has been challenging that way of thinking for many years.
His argument is that government debt is fundamentally different from the debt of a household or business. Much of what we call the national debt represents money that the Government has spent into the economy which has not subsequently been removed through taxation.
There is an important element of truth in that argument.
But it does not mean that Britain can simply ignore its debt.
The reality is more complicated — and perhaps more interesting.
[/b]
The UK Government generally spends more than it receives in taxation and other income.
When that happens, it needs to finance the difference.
It does this largely by issuing government bonds, known as gilts.
Investors buy those gilts and, in return, the Government promises to pay interest and eventually repay the principal.
At the end of June 2026, public sector net debt stood at about £2.99 trillion, equivalent to 94.9% of GDP.
That is an enormous number.
But who actually owns the debt?
It isn't simply some foreign bank demanding its money back.
British pension funds, insurance companies, investment funds, banks, individuals and overseas investors all hold UK government debt.
For them, a gilt is an asset.
For the Government, it is a liability.
That leads to the first part of Murphy's argument.
Government debt is somebody else's asset
Imagine the Government borrows £100 billion and spends it.
The Government has created a liability, but somebody else now has £100 billion of financial assets.
The Government may have borrowed the money by issuing gilts, but the private sector now owns those gilts.
That is why Murphy describes government debt as a form of saving.
There is a substantial amount of truth in this.
If the Government tried to eliminate all its liabilities overnight, it would also remove financial assets from the private sector.
That is why Murphy argues that aggressive debt repayment can reduce private wealth.
The important qualification is that this does not mean the private sector would necessarily become poorer in every meaningful sense. The Government could reduce its liabilities while the private sector acquired other assets. Nor does it mean that every pound of government debt represents money freshly created by the Government.
The financial system is more complicated than that.
Where Murphy is particularly convincing
His strongest argument is against the idea that Britain is financially equivalent to a household.
A household cannot create pounds sterling.
If you spend more than you earn, you eventually have to find somebody willing to lend you the money.
The UK Government operates differently because it issues the currency in which its debts are denominated.
That gives the Government a financial capacity which households do not possess.
This is a fundamental point of modern monetary economics and is not simply something invented by Murphy.
The Bank of England's own balance sheet demonstrates the extraordinary scale of money and central-bank reserves in the modern economy. In July 2026, commercial-bank reserve balances at the Bank of England were still around £640 billion.
So Murphy is right to challenge the idea that the Government has to find a giant pile of pre-existing money before it can spend.
It doesn't work quite like that.
But does that mean Britain has no financial constraint?
This is where I think Murphy's argument goes too far.
The Government may be able to create pounds.
But it cannot create unlimited houses.
It cannot create unlimited nurses.
It cannot create unlimited electricity.
It cannot create unlimited oil, steel, food or skilled workers simply by typing numbers into a computer.
That is the real constraint.
If Government spending increases demand faster than the economy can increase the supply of goods and services, prices can rise.
And Britain has already experienced what happens when inflation becomes a serious problem.
The Government can therefore create money, but it cannot simply create real resources.
That is a crucial distinction.
What about the interest bill?
Murphy also makes another interesting argument.
If the Government is worried about the amount it pays in interest, why not simply reduce interest rates?
The Bank of England sets Bank Rate.
So, in principle, a lower Bank Rate reduces borrowing costs across the economy and can eventually reduce some government financing costs.
But there is a problem.
The Government does not control all the interest rates it pays.
Long-term government borrowing is determined by the gilt market.
Investors decide what return they require to lend to the Government for five, ten, twenty or thirty years.
The Bank of England can influence those rates, but it cannot simply dictate them.
The Bank itself has warned that UK government bond markets have undergone significant structural changes, with higher government borrowing, changes in pension-fund demand and global factors all influencing gilt yields.
So saying "just cut the interest rate" is rather like saying a homeowner should simply tell their mortgage provider to charge less.
It is possible for the central bank to influence borrowing costs, but it has to consider the consequences.
And there is another problem with cutting rates
If inflation is too high, cutting interest rates can make matters worse.
Cheaper borrowing encourages people and businesses to spend and invest.
That can be good when the economy is weak.
But if demand is already too strong relative to supply, it can push prices higher.
The Bank of England therefore cannot simply set interest rates according to what would make the Government's debt-interest bill cheapest.
Its primary monetary policy objective is price stability.
That is why the idea that Britain could solve its debt-interest problem simply by ordering the Bank of England to reduce Bank Rate is too simplistic.
Does repaying the debt cause a recession?
This is another area where Murphy makes an important point, but one that needs qualification.
Suppose the Government decided that it wanted to reduce the national debt rapidly.
It could raise taxes, cut spending, or do both.
But government spending is someone else's income.
A government spending cut can therefore reduce income elsewhere in the economy.
Similarly, higher taxation can reduce the amount households and businesses have available to spend or invest.
If the Government attempted to reduce borrowing very aggressively while the private sector was also trying to save, the economy could indeed be weakened.
Economists sometimes describe this as the "paradox of thrift": what may be sensible for one household can be damaging if everybody tries to do it simultaneously.
That does not mean debt reduction automatically causes a recession.
It means the speed and method of debt reduction matter enormously.
So why are politicians so worried about debt?
Because the interest bill is real.
The Government currently spends enormous amounts servicing its existing debt.
The OBR expects debt-interest spending to rise from around £110 billion in 2025-26 to about £137 billion by 2030-31 under its current forecast. It says debt interest is already around twice the average share of GDP seen during the decade before the pandemic.
That money cannot simultaneously be spent on hospitals, schools, defence, infrastructure or tax reductions.
This is the opportunity cost of debt.
The problem is therefore not necessarily that Britain will one day receive a telephone call demanding that the entire £3 trillion be repaid immediately.
That is not how sovereign debt works.
The problem is that a large stock of debt creates a continuing stream of interest payments.
And if interest rates rise, that stream can become considerably more expensive.
The really important distinction
Perhaps the easiest way to explain the disagreement is this.
Richard Murphy is asking us to think about the national debt from the balance-sheet perspective.
If the Government owes £3 trillion, somebody else owns £3 trillion of government liabilities as financial assets.
That is true.
Traditional politicians are more likely to think about the debt from the fiscal sustainability perspective.
The Government must continually finance its borrowing and pay the interest on it.
That is also true.
These two statements are not actually contradictory.
They are looking at different sides of the same transaction.
What happens if investors lose confidence?
This is the issue that advocates of unlimited government spending sometimes underplay.
Britain's ability to borrow cheaply depends partly on investors being willing to hold its debt at acceptable interest rates.
If investors become concerned about inflation, economic policy or the Government's ability to control its finances, they can demand higher yields on gilts.
Higher yields mean higher borrowing costs.
That can then increase government interest payments and make the fiscal position worse.
Britain saw a dramatic example of how quickly financial markets can react during the 2022 gilt-market crisis.
The lesson was not that the Government cannot borrow.
It was that financial markets still matter, even for a country which issues its own currency.
So is Richard Murphy wrong?
I wouldn't say that.
His challenge to the conventional description of national debt is valuable.
He is right that government debt is also an asset held by somebody else.
He is right that a Government issuing its own currency is not financially constrained in exactly the same way as a household.
He is right that trying to eliminate government debt through aggressive taxation and spending cuts could damage an economy, particularly if private households and businesses are also trying to save.
He is also right that interest-rate policy has a major effect on the Government's interest bill.
But it would be going too far to conclude that Britain therefore has no financial constraint.
It does.
The constraint is not simply finding enough pounds to pay the bills.
It is maintaining confidence, controlling inflation, keeping borrowing costs manageable and ensuring that government spending does not exceed what the real economy can supply.
Perhaps the argument should change
The political argument about Britain's debt is often presented as though there are only two choices.
Either we reduce the debt immediately or we are being financially irresponsible.
Or we stop worrying about the debt because the Government creates money anyway.
Neither is satisfactory.
The better question is what the borrowed money is being used for.
Borrowing £100 billion to build infrastructure which increases productivity, improves transport, generates energy and raises future economic output is very different from borrowing £100 billion simply to maintain consumption without increasing the economy's capacity.
The first could potentially make the debt easier to manage in the future.
The second may simply leave taxpayers with a larger interest bill.
That is why the quality of government spending matters at least as much as the headline size of the debt.
The £3 trillion question
Britain does not need to behave like a household and pay off every penny of national debt.
In fact, doing so would fundamentally change the financial assets available to the private sector.
But neither can we simply declare that £3 trillion of debt does not matter because the Government creates pounds.
Both extremes miss the point.
The national debt is simultaneously a Government liability and somebody else's financial asset.
It is also a source of interest payments which have to be financed.
And the Government's ability to create money does not give it the ability to create unlimited real wealth.
That, ultimately, is where I think Richard Murphy's argument is most useful.
He is right to challenge the simplistic statement that Britain is "maxing out its credit card".
But those who respond by saying that the Government can therefore spend without financial limits are making an equally simplistic argument.
The real limit is not the number printed on the national debt counter.
The real limit is what Britain's economy can produce without creating inflation, damaging confidence or forcing interest rates higher.
And perhaps that is the debate politicians should be having.
Not simply:
"How do we pay off the debt?"
But:
"What should we borrow for, how much can the economy safely absorb, and will today's borrowing make tomorrow's Britain richer or poorer?"
That is a much harder question.
But it is probably the one that matters most.
Richard Murphy published newmarial on a daily basis and we often feature his videos. To read allof his material go to https://www.taxresearch.org.uk/