The amount the Government pays to service nearly £3trillion of national debt will exceed what it needs to borrow just to balance the books next year, official figures show.
The news will make grim reading for the Chancellor, John Healey, as he tries to make the sums add up in his maiden Budget later this month.
It comes just days after Britain became the first G7 economy to see its national borrowing costs top six per cent since the eurozone crisis as the global bond market rout deepened.
Rising borrowing costs push up the interest bill on the ballooning national debt, which is already at its highest level relative to the size of the economy since the early 1960s.
Debt interest payments now account for £8 of every £100 the Government spends – money that would otherwise go on public services such as defence, or to cut taxes.
The interest bill is due to rise from £109 billion in 2025/26 to £117 billion in 2027/28, overtaking the public sector net borrowing estimate of £96.5 billion that year, according to the Office for Budget Responsibility (OBR), the official forecaster.
‘It’s a landmark no government wants to reach,’ said Paul Dales, the chief UK economist at Capital Economics.
‘It highlights how interest payments are becoming a more dominant part of government spending,’ Dales added. But economists have warned that the hit to the public purse could be even worse as the Middle East conflict fuels inflation, sending borrowing costs even higher.
The Daily Mail recently reported that Healey faces an interest bill approaching £700 billion over the next five years, almost £60 billion more than the OBR’s forecast in March.
Capital Economics expects debt interest payments to rise to £149 billion in 2030-31 versus an OBR forecast of £137 billion.
In total, Capital Economics believes servicing the national debt will cost £682 billion over the five-year period – around £58 billion more than pencilled in by the OBR.
‘We think that debt interest payments are likely to be around £9 billion to £10 billion higher in each year,’ added Andrew Goodwin, the chief UK economist at the Oxford Economics consultancy.
It means Healey risks breaching his fiscal rules that mandate a fall in borrowing by the end of the forecast period unless he cuts public spending or raises taxes. The amount of fiscal ‘headroom’ that the Chancellor has to play with has already halved to around £12 billion as the bond market sell-off pushes yields – or the interest rate – on Government debt ever higher.
Britain pays more than any other G7 country to borrow, in part because around a quarter of its debt is index-linked, meaning that returns are protected from inflation.
This proved a boon to the Treasury when prices rose slowly during the previous decade of ultra-low interest rates.
But public finances have been clobbered by Covid and Russia’s invasion of Ukraine, which sent energy costs rocketing, leading to higher borrowing costs to curb inflation.
Experts say that there is also still a ‘moron premium’ to be paid after the Liz Truss mini-Budget of unfunded tax cuts in 2022 nearly blew up the pensions market and sent mortgage costs soaring.
The OBR, which is currently updating its forecasts ahead of the Budget on October 28, declined to comment.
A Treasury spokesperson said: ‘Fiscal discipline is the bedrock of economic stability and national security.
‘The Chancellor and Prime Minister are in lockstep that the Government will meet the fiscal rules, with a buffer against uncertainty – and that includes getting debt down.’