Introduction
The new UK government elected in July 2024 has promised a ‘decade of national renewal’, realised through its Industrial Strategy, its Infrastructure Strategy, and the transition to Clean Power. The state’s footprint on what is meant to be a free market economy will be substantially expanded. The costs of this ‘renewal’ will test the financial resources of UK businesses and individuals to breaking point.
The full IREF report behind this article is available through this weblink.
The government’s spending plans
The government’s documents point to a total amount to be spent by 2035 of £1.64 trillion, which is 58% of the UK’s 2024 Gross Domestic Product (GDP):1
| Item | Amount 2025-30 | Amount 2030-35 | Total to 2035 |
| Industrial Strategy only | £192.0bn | £205.0bn | £397.0bn |
| Infrastructure Strategy without Clean Power | £333.8bn | £263.9bn | £597.7bn |
| Infrastructure for Clean Power | £239.6bn | £407.0bn | £646.6bn |
| Total | £765.4bn | £875.9bn | £1,641.3bn |
How the £1.64 trillion will be raised
The government plans to contribute around £270 billion over the ten years, or 16% of the total. This is its planned ‘borrowing-for-investment’.
The remainder will come from UK pension funds and miscellaneous international sources including China,2 and shadow banks:3
| Investment amount | -£1,641.3 billion |
| Borrowing-for-investment | £270.0 billion |
| To be raised from third-parties | -£1,371.3 billion |
| Pension funds under the Mansion House Accord4 | £50.0 billion |
| International Investment Summit in October 20245 | £63.0 billion |
| Amount still to be found | -£1,260.3 billion |
What is ‘shadow debt’?
‘Shadow debt’ means a debt for which the UK’s businesses and individuals are responsible, but which does not appear in the UK’s national debt figures.
The 16% contributed by the government would have appeared in the old measure of UK national debt called ‘Public sector net debt’, but it will not appear in the new measure that the government has adopted, called ‘Public sector net liabilities’.
The remaining 84% is borrowed by companies that are nominally in the private sector. For that reason the debt can be eliminated from the statistics, even if the borrower either receives all its revenues under a single contract with a public sector entity, or has been licenced by the public sector to sell direct to UK businesses and individuals under monopolistic arrangements, thereby being granted a form of tax-raising power.
The lenders of the 84% can construe their credit risk as being on the UK public as a collective, one way or another, and carrying the same credit risk as UK government bonds. Government bonds are recorded as national debt, but the niceties of the structuring of ‘shadow debt’ enable it to remain hidden.
The government’s plans will add ‘shadow debt’ of 58% of UK GDP, on top of the visible debt of 100% of UK GDP.6
How ‘shadow debt’ is created
The toolkit for creating ‘shadow debt’ is the same set of techniques as was integral to a string of financial disasters such as Enron, Tyco, WorldCom, and the creation of Residential Mortgage-Backed Securities in the run-up to the Global Financial Crisis by Lehman Brothers, Bear Stearns, and Northern Rock. The techniques slice the finance amount into ‘tranches’, each of which is sold to a different type of investor.7
Two types of scheme will be used:
- A new version of Private Finance Initiative (PFI), for schemes where a public sector entity is the user of the asset that is constructed;8
- A ‘Direct sale’ scheme, frequently for clean power, whose product or service is billed directly to UK businesses and individuals.
Both types of scheme offer high returns to investors in them: consequently they are disastrously expensive for UK businesses and individuals.
How UK businesses and individuals end up paying
UK businesses and individuals pay for PFI because their taxes ensure that the scheme user – a public sector entity – can keep up its PFI payments.
UK businesses and individuals pay for the ‘Direct sale’ scheme in two ways:
- They have to buy its products or services, at whatever price the supplier demands, and they cannot shop elsewhere or not shop at all; and/or
- They have to pay through their taxes to subsidise the price of the products and services which they or others like them buy.
These are the arrangements whereby lenders into the schemes can construe their credit risk as being on the ability of UK businesses and individuals collectively to pay – the same credit risk as UK government bonds carry – even if their direct counterparty is a private-sector entity.
How much will be financed under each funding model, and at what lifetime cost
Out of the £1.64 trillion investment amount, about £350 billion is eligible for PFI financing, leaving £1.29 trillion to be done using the ‘Direct sale’ model.
Assuming each scheme has a 20-year financing period and the expenditure is incurred evenly from 2025 to 2035, the total cost for the PFI investments comes out as £512 billion, and that of the ‘Direct sale’ investments (and this includes the transition to Net Zero) as £6,151 billion.9
The total financial imposition – at £6.7 trillion – comes out as 234% of the UK’s 2024 GDP.
This amount will have to be drawn, one way or another, from UK businesses and individuals. At its peak, the debt service equates to an increase in taxation of 15% of GDP, from its current level of 35% of UK GDP to 50%.
But neither the debt nor the majority of the debt service will leave any footprint in the government’s accounts: the debt is ‘shadow debt’ and the debt service is ‘shadow taxation’.
Summary and conclusions
The UK government’s plans will act as a sandbox for testing how much ‘shadow taxation’ a country’s businesses and individuals can sustain before they become unable to meet their own costs of living and the cost of the visible taxation that the government levies upon them, not least to enable the government to pay the capital and interest on the acknowledged national debt.
This is analogous to a stress-test on a model of a new bridge, to see how large a burden can be placed on it before it collapses. In this case the stress-test will be carried out on the UK economy, and through the economy also on the UK social and political model of a Western, liberal, representative democracy under the rule-of-law.
BL/24.10.25
1 UK 2024 GDP was £2,851 billion
2 This is why the government has not pursued an espionage case under which China had come by classified information. China is vital to the government’s growth plan, as per this article: https://www.telegraph.co.uk/politics/2025/10/20/foreign-office-china-was-essential-to-labour-growth-plan/
3 As long ‘shadow banks’ do not fail as a sector in the meantime, in line with warnings recently raised by Andrew Bailey, the Governor of the Bank of England: https://www.thisismoney.co.uk/money/markets/article-15214281/Alarm-bells-ring-risky-lending-Bailey-orders-stress-test-shadow-banking-amid-fears-new-financial-crisis.html
4 An accord between the government and certain types of UK pension fund made in 2025, whereby these funds would invest a certain proportion of client monies in the UK government’s schemes as long as the client-in-question had not instructed their fund manager to the contrary
5 Government event to obtain commitments from foreign investors
6 The UK’s ‘Public sector net debt’ currently stands at +/- 100% of GDP
7 Andrew Bailey also referred, in the article referenced in Footnote 3 above, to ‘tranching’ being now noticeable again in ‘shadow banking’: ‘He [Bailey] said: ‘We certainly are beginning to see, for instance, what used to be called slicing and dicing and tranching of loan structures going on..’
8 £94 billion of ‘shadow debt’ still remains from Labour’s last usage of PFI between 1997 and 2010, as we worked out and contributed to a diagram that appeared in the Daily Telegraph on 9th February 2025
9 20 years was chosen as the financing period as this is the new lifetime of contracts under the UK’s renewable energy support scheme, aimed at making the related projects more easily financeable – which translates into the projects being able to charge UK businesses and individuals for longer
Photo by Phillip Flores
