Introduction
The UK Budget papers of November 2025 acknowledge the funding models through which the government plans to increase the liabilities of UK taxpayers, beyond the government borrowing the money and raising the main measure of national debt, Public sector net debt (or PSND).
This is as predicted in our report published by IREF in October 2025 about the UK’s ‘shadow debt’ and resultant need for ‘shadow taxation’ to service that debt.
The UK Budget papers discuss processes and controls for where funding models touch the public accounts. This creates a false sense of security. Two mainstream models for contracting ‘shadow debt’ do not touch the public accounts, and will spell the end of the UK as a market economy.
Common thread
The common thread is that there is a scheme initiated by government to meet public policy objectives, which uses private funding and is run by private companies, and where the scheme’s heavy debt service costs are factored into its charges. The more these charges are levied directly on UK businesses and individuals, the smaller the footprint in the public accounts.
First form of debt – the government borrows-to-invest
The first form of ‘shadow debt’, though, is where the government borrows, and then the proceeds are put to some purpose that can be classified as an ‘investment’. The debt and the ‘investment’ are netted off in the public accounts under the UK government’s new and preferred measure of national debt: Public Sector Net Financial Liabilities (or PSNFL). PSNFL does not increase, however much is borrowed.
Second form of debt – Public Private Partnership (or PPP)
The second form of ‘shadow debt’ is where a private company is engaged by government to build an asset, like a prison or hospital, for which the using client is a public sector entity. The debt taken on falls neither into PSND or PSNFL. Nevertheless, the entire debt service comes from public budgets.
Figure 1.A on p. 7 of the ‘Balance Sheet Framework’ document shows the relationship between PSND, PSNFL, and PPP:2
Third form of debt – the public sector has a Contingent Liability
The third form of ‘shadow debt’ pertains to Contingent Liabilities as defined in para. 1.8 on p. 8 of the Supplementary document to the Budget entitled ‘Guidance for managing government’s implicit liabilities’: Contingent Liabilities are ‘commitments to use public funds if uncertain future events occur’.
The UK government and its captive entities – the Public Financial Institutions3 – will issue guarantees to other lenders into state-directed schemes, a tried-and-tested method of increasing taxpayer liabilities without increasing measures of debt. If the lender calls the guarantee, though, the government does have to borrow the money to pay them, but in the interim the taxpayer’s liability is obscured.
Fourth form of debt – the public sector has an Implicit Liability
The fourth form of ‘shadow debt’ is Implicit Liabilities, a subset of Contingent Liabilities, but where there is no legally enforceable commitment by the government to pay in. These are defined in para. 1.9 on p. 8 as “obligations that a government may feel obliged to fulfil for political or moral reasons in the absence of any contractual or legal obligation to do so’.
These could be large and important utilities. If they fail, whole areas of the UK could be blacked out, in which case the government might feel obliged to bail them out, increasing its own borrowings to do so.
Limitation of the protections for the taxpayer under the forms of ‘shadow debt’ discussed up to now
The UK government papers about these first four forms of ‘shadow debt’ infer diligence, prudence, and a desire to protect the taxpayer. This is illusory: the government’s concern is to shield the public accounts from the scale and impact of their schemes, not the public. Investors, credit rating agencies, and the public themselves will be deceived about the volume and cost of the UK’s ‘shadow debt’, as the final two types of schemes will impose their charges directly onto the public. These schemes will thereby leave little or no footprint in the public accounts, while putting their heavy boots right onto the public – both onto businesses and onto individuals.
Fifth form of debt – suppliers can force charges onto business and individuals
The fifth form of ‘shadow debt’ is taken on by a private scheme in the manner described in ‘Balance sheet framework’ p. 58 para. 7.12 under ‘Mandating a revenue stream’ – ‘government mandates consumers or firms to make compulsory and unrequited payments to fund an asset, proxying general taxation (e.g. levies on general billpayers not necessarily in receipt of benefits)’.
In simple language this means that bills – most likely for water, electricity, or gas – for businesses and individuals are increased to pay for something they have not bought or used, so as to service the scheme’s debts. This is the acme of ‘shadow taxation’.
Sixth form of debt – private sector schemes granted a de facto monopoly
The sixth form of ‘shadow debt’ is for financing privately-owned schemes to achieve Net Zero, funded with expensive third-party debt but representing neither:
- A Contingent Liability nor an Implicit Liability;
- A mandated revenue stream – because the scheme can only charge in respect of supplies it has delivered to the same business or individual that the bill is presented to.[4]
The model is described as where there is ‘voluntary user charging for services received or granting regulatory licences that permit the private sector to charge users’.
We are unlikely to see much that is voluntary i.e. conducted between a willing seller and a willing buyer who has alternative sources of supply available to them and a range of value propositions to choose from.
The second half of the sentence will predominantly come into play: ‘regulatory licences’ will grant a de facto monopoly to a private sector enterprise whereby the user will not have the opportunity to switch suppliers for a better deal, or to not buy at all. The purchase under this version is involuntary.
The supplier will be licenced to sell into a captive market and at a high price, enabling the supplier to service and repay its expensive debt. The arrangement resembles a right conferred on the supplier to levy taxation, such that the charges can rightly be termed ‘shadow taxation’. The payers within this captive market are proxies for the taxpayer: the only variable is the size of the allotted catchment area compared to the whole of the UK.
Summary and conclusions
The UK government’s spending plans are on such a scale that debt will increase in all of the six forms described. The government’s papers about controlling the degree of its own risks are a distraction: the papers leave important models out-of-scope of any control.
The UK government intends to increase its own borrowing-for-investment by £270 billion over ten years, without the figure for PSNFL rising at all.
Private Finance Initiative will be relaunched as Public Private Partnership, creating long-term liabilities for the public.
The government and its captive entities – the Public Financial Institutions – intend to make capacious usage of the issuance of guarantees and other unfunded, off-balance-sheet liabilities, increasing the Contingent Liabilities of the taxpayer without raising PSND or PSNFL.
Implicit Liabilities, for all the government’s emphasis on it, appears to be the least likely area to experience explosive growth.
That leaves two models which have little or no footprint in the public accounts and over which the government’s papers propose no controls:
- The model where the scheme’s debt service is met by UK businesses and individuals having amounts added to their bills for supplies they have not bought or used;
- The model whose debt service will be met by UK businesses and individuals becoming enslaved to suppliers without the right to buy elsewhere or not to buy at all – and it will not matter anyway because all suppliers will be selling at a high, government-set price.
Such arrangements will mark the death of the UK as a market economy, let alone a free market economy.
1 https://www.lyddonconsulting.com/the-united-kingdom-as-a-sandbox-for-state-directed-investment-with-a-major-increase-in-shadow-debt-and-in-the-shadow-taxation-required-to-service-that-de/ accessed on 28 January 2026
2 Available as one of the ‘Supplementary documents’ through https://www.gov.uk/government/collections/budget-2025
3 Such as the National Wealth Fund, UK Export Finance, the British Business Bank, or Great British Energy
4 ‘Balance sheet framework’ p. 58 para. 7.12 ‘Mandating a revenue stream’
Phpt by Linh Ha
