Debt interest being such a large factor as it is now is far from being a new phenomenon. During the Napoleonic Wars, debt interest accounted for almost 60pc of government spending. From the end of the Second World War until the mid-1980s, on average debt interest accounted for about 10pc of all government spending. A combination of inflation, real economic growth, occasionally tight fiscal policy and (eventually) low real interest rates saw it fall back to just over 2pc in 2020/21 after which, as we have seen, it surged higher.
We are by no means out of the woods yet. According to current fiscal plans, although fiscal policy will be tightened over coming years, the debt ratio doesn’t peak until 2026/27. In due course, sooner or later, interest rates will come down and this should help to reduce the cost of new borrowing.
Even so, according to the Office for Budget Responsibility, after falling back a bit over the next few years, debt interest as a share of GDP starts to rise again.
The reason is that throughout this period we have continued to enjoy the benefits of the Government having financed some of its requirements with borrowing carrying very low rates of interest. As those gilts mature, they will need to be replaced with gilts carrying a higher rate of interest.
Accordingly, having fallen below 8pc, by 2028/29 the ratio of debt interest to overall government spending is set to rise back up to 8pc.
It is often said that we will have to bear the consequences of so much government largesse in the Covid years and beyond. This is where we see the consequences – not in the need to repay the debt but in the continuing costs of servicing it.
Roger Bootle is senior independent adviser to Capital Economics. [email protected]
