The national debt’s interest payments have reached a two-decade high with a 5.05% rate on 30-year bonds, presenting a financial challenge for Chancellor Jeremy Hunt ahead of the November 22 autumn statement.
Hunt has already ruled out tax cuts for November, and the increased cost of servicing the £2.59 trillion national debt may influence spending decisions.
The UK government borrows money through bonds, or “gilts,” typically considered secure. A higher interest rate on government debt implies setting aside an additional £23 billion for interest payments, potentially reducing spending on public services.
The current debt level, more than double that of the 1980s to 2008, has risen due to the 2007/8 financial crisis and the COVID-19 pandemic.
Despite this, the current debt-to-GDP ratio remains relatively low compared to much of the last century. Global trends, including rising borrowing costs in the US, Germany, and Italy, reflect market adjustments to prolonged high interest rates and increased worldwide government borrowing.
Central banks, such as the Federal Reserve and the Bank of England, are committed to “higher for longer” interest rates to address inflation. In the last fiscal year, the government spent £111 billion on debt interest, surpassing education spending.
While some economists express concerns about excessive borrowing, others argue that additional borrowing supports economic growth, generating more tax revenue over time.
The Office for Budget Responsibility warns of potential soaring public debt as the population ages and tax income declines in an ageing society.