Britain will have the highest debt burden of any major economy as the cost of servicing government debt of £2.4tn soars
Britain will have the highest debt burden of any major economy after the real cost of a decades-long borrowing binge was laid bare in Chancellor Jeremy Hunt’s Budget.
Hunt last week signed a punitive package of tax increases and spending cuts to reduce underlying debt as a share of national income after three years in a move designed to calm nervous financial markets.
But the total cost of servicing the government’s debt of £2.4 trillion will reach a staggering £584 billion over the next six years, or almost four times the annual budget of the NHS.
The cost of servicing Britain’s debt was laid bare in Chancellor Jeremy Hunt’s Autumn Statement
The interest bill on that huge amount of borrowing is expected to peak this year at a whopping £120bn. or £1,800 per person, according to the Office for Budget Responsibility, the independent watchdog.
The staggering sum is equal to 4.8 percent of annual output or 12 percent of income, in both cases, the highest since immediately after World War II.
It means the amount spent on debt service will skyrocket above that of Italy, Europe’s most indebted country, and much higher than that of the United States or Japan, according to the latest data from the European Commission.
“That’s a staggeringly high number,” said Stefan Koopman, a senior macro strategist at Rabobank, an investment bank. “Having to pay so much to pay down the costs of existing debt is going to crowd out a lot of spending on public services and investments.”
Analysts say the reason the UK’s debt bill is so high is because much of it is linked to inflation.
The OBR estimates that 22 percent of public lending is now linked to the retail price index (RPI), compared with 6 percent in 2000-01.
The RPI is currently at 14.2 percent, much higher than the consumer price index at 11.1 percent, making the debt burden even higher.
But the Government is still forecast to spend more than £100bn in interest payments on the debt in 2027/28, according to the OBR.
“All the loans we’ve made in recent years are coming home,” said Paul Johnson, director of the Institute for Fiscal Studies think tank.
Britain pioneered the use of inflation-linked gilts in the 1980s to finance government spending and investment.
Years of ultra-low interest rates kept the cost of servicing the national debt in check and kept the pension funds that bought these gilts happy, since their members were protected from the risk of rising prices.
But the financial crisis, Covid and the Russian invasion of the Ukraine have led to the issuance of record amounts of debt and, lately, soaring prices and costs of borrowing, leaving the UK exceptionally exposed.
“It is not only the scale, but also the speed with which higher interest rates and inflation have raised the costs of debt service that is a warning for this and future foreign ministers,” warned the president of the OBR, Richard Hughes.
“The interest burden on debt over the next five years is projected to be almost double what UK governments have become accustomed to in the last two decades,” it added.
‘The share of government resources consumed by the cost of servicing that debt at its highest level in a generation.
“This leaves UK public finances more sensitive to movements in interest rates than they have been for decades.”
The Treasury Office of Debt Management has been contacted for comment.