The government have to pay interest on its debt. The interest rate is determined by the demand for government bonds.
- If demand for buying government debt falls, the price of bonds rise, pushing up bond yields, increasing the cost of borrowing.
- Some European countries like Ireland and Italy have seen rapid increases in bond yields, making it very expensive to service the debt. This is because markets worry about their ability to repay debt.
- The UK has seen a rise in debt levels, but interest rates have actually fallen.
- The cost of government debt interest payments in the UK are around £45 bn a year or 3% of GDP.
Cost of Interest Payments £ billion
Cost of Interest Payments on UK Debt as a % of GDP
Cost of Interest Payments
The cost of interest payments in the UK are around £45 bn a year. In the first six months of 2010, the debt interest payments were £21.6bn, suggesting an annual cost of around £43bn (3% of GDP) (UK Debt)
I found statistics for debt interest payments, but only in pdf format – UK Debt-interest-payments
Clearly the amount we spend on debt interest payments depends on
- the amount of debt
- Interest rates on UK bonds.
Effective Cost of Borrowing
Why has the Interest on UK Borrowing Fallen?
Bond yields in the UK have fallen since 2007 because
- Low inflation expectations
- Low expectations about economic growth have made ‘safe’ UK government bonds more attractive than riskier private sector investment
- Policy of quantitative easing and purchase of government bonds by Central Bank
- UK seen as a relative ‘safe haven’ compared to countries in the Eurozone (Being in the EUrozone makes you more vulnerable to liquidity crisis because you can’t print your own currency like the UK can)
- See also: reasons for falling bond yields
Interest Payments as % of Tax Revenue
source: World bank
Readers Question: Re: Who Lends the Government Money
If I have understood your response correctly, rather than borrow money, the government finances its operations by issuing bonds. Presumably the individuals identified buy these bonds with a promised rate of return over a given time period. When that time period is up the government must give the money back with the agreed rate of interest. In the meantime they will have raised some more bonds such that they only every really have to cover the money they promised in interest.
How does one go about calculating the “interest repayments” in a given time period and is this information publically available?
Yes, that is partly correct. Though also, as well as meeting interest payments, governments will need to raise more funds when bonds expire. For example, when a 10 year bond expires, the government have to pay the full cost of the bond back.
Therefore one issue in the liquidity of a government is the maturity on bonds. The UK has one of the longest bond maturity rates (over 12 years) this means we have a longer period until bonds expire. However, if some countries finance their deficit by selling short term bonds and gilts (say 1 year). They will have to not just pay interest, but also frequently raise more money when the 1 year bonds expire.
You can see a table of bond maturity levels on this post – Global Debt Crisis
Cost of US Debt Interest Payments
For example, the US saw a fall in the cost of servicing its debt in 2009 because bond yields fell, despite a growth in US Debt.
Global Debt Interest Payments on Debt
- Source: OECD economic outlook, 91
- Should We worry about National Debt?
- The biggest lie in UK politics? – Is the debt issue exaggerated?