150421 Debt interest
  • Debt or defence? Debt means interest payments. And big debt means big interest payments. As the above graph shows, our government is expecting to pay out £33.7 billion in interest this year. That’s almost as much as the entire annual defence budget. Or more than the departmental budgets for Transport, the Home Office, Justice and Energy combined.
  • Interest on top of interest. The obvious difference between the debt interest payments and those other budgets is one of trajectory. Although the departmental spending allowances haven’t been set for the years after this one, it’s safe to assume that they’ll remain relatively flat. Whereas debt interest is forecast to go from £33.7 billion now to £51.1 billion in 2019-20; a 52 per cent increase. This is one of the great moral – as much as fiscal – burdens of borrowing. Future taxpayers will have to stump up £billions to simply service the debt, let alone pay it off.
  • It could have been worse… But if you think those numbers are bad, wait ‘til you gettaload of the Office for Budget Responsibility’s original forecasts. Back in 2010, they reckoned that debt interest would stand at £63.1 billion this year, which is more than what’s spent on education. This is one of those rare cases, in this Parliament, where outcomes have exceeded expectations.
  • …so why it is not? This happy distance between outcomes and expectations isn’t really to do with the Government borrowing less – as we know, they’re actually borrowing more than the OBR originally foresaw. It has two other causes. The first is George Osborne’s demand that the Bank of England hand over the interest accrued from its quantitative easing programme, which shaves £12.3 billion off this year’s total. The second is low inflation (which affects index-linked gilts) and our persistently lower interest rates.
  • The unknowable future. What would happen to debt interest payments if inflation or interest rates rose? The OBR has put together a “ready reckoner” (on p.156) to try and answer that question. According to their calculations, a 1 per cent rise in the forecast level of RPI inflation, for instance, would increase the nation’s interest bill by almost £6 billion in 2019-20. This is the problem with debt interest; it rises and falls with other variables. And that’s even before we consider the prospect of another Labour government.