How the national debt affects your finances

Chancellor Rachel Reeves has altered how national debt is calculated as part of efforts to balance the books in her first Budget.

It comes as the country's national debt has reached £2.7 billion, according to the Office for National Statistics - and there are warnings that it could get worse.

The director of fiscal affairs at the International Monetary Fund Vitor Gaspar, told Sky News ahead of the Budget that the UK's national debt level is "high, rising and risky".

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He said public investment is needed to boost growth and avoid letting borrowing "rise well in excess of pre-COVID levels".

What is national debt?

Most of the government's income is from taxes.

Governments may also borrow money from each other and investors such as pension funds to fill gaps between their income and spending, said the World Economic Forum, "because tax rises are politically difficult".

A government may borrow money, said BBC News, so it can pay for big projects such as new railways and roads to "boost the economy".

The national debt is the total borrowing that has "built up over years", added the news website.

The figure gives voters a sense of how much the government is "deferring the costs to future taxpayers", said the Institute of Government, while investors get an idea of whether the state can afford to repay any money they lend.

How is national debt measured?

There are various ways that different countries measure national debt.

The UK measures it against national income or gross domestic product.

According to the Office for Budget Responsibility, the national debt figure will be equivalent to 98.8% of national income for 2024/2025, "equivalent to around £96,000 per household".

But it may hit more than 270% over the next 50 years, the OBR warned, due to "pressures from an ageing population, the climate crisis and security risks".

The Labour manifesto pledged that its day-to-day costs would be met by revenues, while debt should fall as a share of the economy "by the fifth year of the economic forecast".

But Reeves has made a "technical change to the way debt is measured", said MoneyWeek, "to allow the government to pay for extra investment".

She wrote in the Financial Times (FT) that the change would "make space for increased investment in the fabric of our economy".

The change could give the chancellor "space to borrow" an additional £50 billion a year by the end of the decade, added the FT, and "still have debt falling".

Reeves told ITV News that the investment rule change will "take into account our assets not just the costs of investment".

What does the national debt mean for your finances?

The chancellor's commitment that public debt should be falling — relative to the size of the UK economy — gives her a problem, said Paul Johnson, director of the Institute for Fiscal Studies in The Times.

She will only be able to achieve that by "increasing taxes or squeezing spending", which is why she has searched for a new measure of debt.

The extra money generated from the new calculation method is expected to go towards building projects such as roads and railways, added MoneyWeek, but tax rises and spending cuts are still expected.

The higher debt levels may not be good news for everyone.

Former chancellor Jeremy Hunt warned that increasing borrowing "could mean that interest rates would be higher for longer".

He said on social media website X, that this would "punish families with mortgages".

Gilt yields - the amount of interest the government pays on its debt based on how risky its creditors believe it is have already increased in recent days and Hunt added that "the markets are watching".