Debt interest payments are the amount the government need to pay to holders of government bonds. It is the cost of servicing public sector debt.
- One forecast by Pantheon Macroeconomics suggested that the UK’s debt interest bill would rise to £123bn for the current financial year alone, £35 billion higher than previously forecast and £54bn more than previous year. (This is Money) .
- Sir Charlie Bean – ex Bank of England chief economist – told Channel 4 (sep 2022) that the rise in interest rates (including long-dated gilts) since Friday will cost the Government an extra £20 bn a year.
The level of debt interest payments depends on:
- Outstanding levels of government debt. In June 2023, UK public sector net debt was £2,567.7 billion or around 100% of GDP).
- Interest rates on debt.
- Bond yields can rise or fall depending on the economic situation. In 2021, bond yields fell to 0.8%, but after mini-budget of Sept 2022, bond yields shot up to 4.5% which will cause a very large increase in debt yields.
- Inflation – A higher inflation rate will lead to an increased cost of index-linked gilts (bonds where interest payments are directly linked to the inflation rate.) Higher inflation will also put upward pressure on interest rates.
Sources for debt interest payments