Britain to have the highest debt burden of any major economy

Britain will be the most indebted of any major economy after the true cost of decades of borrowing was exposed in Chancellor Jeremy Hunt’s budget.

Hunt last week approved a punitive package of tax increases and spending cuts to reduce underlying debt as a percentage of national income after three years in a bid to calm jittery financial markets.

But the total cost of paying off the government’s £2.4 trillion mountain of debt will be a staggering £584 billion over the next six years – or nearly four times the National Health Service’s annual budget.

The interest bill on that huge amount of loans is expected to peak at a whopping £120bn this year. or £1,800 per person, according to the Office for Budget Responsibility, the independent watchdog.

The staggering amount is equivalent to 4.8 percent of annual production or 12 percent of sales – in both cases the highest since immediately after World War II.

According to the latest data from the European Commission, the amount spent on debt service will exceed that of Italy – Europe’s most indebted country – and much higher than that of the US or Japan.

“It’s an astonishingly high number,” says Stefan Koopman, senior macro strategist at Rabobank, an investment bank. “Having to put down that much to pay off the cost of existing debt will displace a lot of spending on public services and investment.”

Analysts say the UK debt bill is so high because much of it is related to inflation.

The OBR estimates that 22 percent of government borrowing is now linked to the retail price index (RPI), compared to 6 percent in 2000-2001.

RPI is currently running at 14.2 percent, much higher than the consumer price index of 11.1 percent, adding to the debt burden.

But according to the OBR, the government is still expected to pay more than £100bn in debt interest in 2027/2028.

“All that borrowing we’ve been doing over the years is coming home,” said Paul Johnson, director of the Institute for Fiscal Studies think tank.

In the 1980s, Britain pioneered the use of index-linked government bonds – or debentures – to fund government spending and investment.

Years of ultra-low interest rates kept the cost of paying down the national debt in check – and kept the pension funds buying 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 recently the prices and cost of borrowing have skyrocketed, leaving the UK uniquely exposed.

“It’s not just the scale, but the speed at which higher interest rates and inflation have pushed up the debt burden is a warning to this and future Chancellor,” warned OBR chairman Richard Hughes.

“The interest burden on debt over the next five years is expected to be almost twice what UK governments have become accustomed to over the past two decades,” he added.

The portion of government resources consumed by the cost of paying that debt to the highest level in a generation.

“As a result, British public finances are more sensitive to interest rate movements than they have been in decades.”

The Treasury’s Debt Management Office was approached for comment.