Britain will have the highest debt burden of any major economy after Chancellor Jeremy Hunt’s budget exposed the true cost of decades-long borrowing.
Hunt last week approved a punishing package of tax hikes and spending cuts to reduce the underlying debt as a proportion of national income, in a move designed to reassure jittery financial markets.
But the total cost of repaying the government’s £2.4 trillion debt will reach an astonishing £584 billion over the next six years – or almost four times the National Health Service’s annual budget.
The cost of servicing Britain’s debt was highlighted by Chancellor Jeremy Hunt’s Autumn Statement
The interest bill on such a huge amount of borrowing is expected to peak at £120 billion this year. or £1,800 per person, according to the independent watchdog Office for Budget Responsibility.
The staggering amount equates to 4.8 percent of annual output or 12 percent of revenue—in both cases, the highest since immediately after World War II.
According to the latest figures from the European Commission, this means the amount spent on repaying the debt will exceed that of Italy – Europe’s most indebted country – and far more than that of the US or Japan.
‘It’s a surprisingly high number,’ said Stefan Koopman, senior macro strategist at Rabobank, an investment bank. ‘Earning this much money to pay off the cost of existing debt will reduce spending on public services and investment.’
Analysts say the reason the UK’s debt bill is so high is because a lot of it is linked to inflation.
The OBR estimates that 22 per cent of public borrowing is now linked to the Retail Price Index (RPI), as against 6 per cent in 2000-01.
The RPI is currently running at 14.2 per cent, which is much higher than the Consumer Price Index of 11.1 per cent, adding to the debt burden.
But according to the OBR the government is still forecast to spend over £100bn in debt interest payments in 2027/28.
Paul Johnson, director of the Institute for Fiscal Studies think-tank, said: “All that we’ve borrowed over the past several years is coming back home.”
In the 1980s Britain pioneered the use of inflation-linked gilts – or IOUs – to fund public spending and investment.
Years of very low interest rates kept a lid on the cost of servicing the national debt – and kept the pension funds that bought these gilts happy because their members were shielded from the risk of rising prices.
But the financial crisis, Covid and the Russian invasion of Ukraine have led to record amounts of debt being issued – and, subsequently, raised prices and borrowing costs, leaving Britain uniquely exposed.
‘Not only the scale, but the speed at which high interest rates and inflation have driven up debt service costs is a warning to this and future chancellors,’ warned OBR chairman Richard Hughes.
‘The debt interest burden is projected to almost double over the next five years, as UK governments have become accustomed to over the past two decades,’ he said.
‘The share of government resources that costs to service that debt reaches its highest level in a generation.
‘This makes the UK public finance more vulnerable to interest rate fluctuations than it has been in decades.’
Treasury’s Office of Debt Management was contacted for comment.
Credit: www.thisismoney.co.uk /