The Government is paying £2billion a month to service the nation’s ballooning debt pile.
According to Budget documents, the interest bill will hit £24.8billion in 2021-22 before rising to £33.7billion in 2025-26.
The figures are large but manageable given record low borrowing rates. But it is feared that a rise in interest rates could push the cost of servicing the debt sharply higher – further damaging the already creaking public finances.
According to Budget documents, the interest bill on Britain’s national debt will hit £24.8bn in 2021-22 before rising to £33.7bn in 2025-26
In the Budget, Chancellor Rishi Sunak said: ‘While our borrowing costs are affordable right now, interest rates and inflation may not stay low for ever.’
A one percentage point rise in interest rates, off the back of a post-pandemic inflation spurt, would add £20.8billion to debt interest payments for 2025-26.
This would bring the total to £54.5billion – nearly double what is forecast – which would be a hammer blow for Sunak in his battle to balance the books.
And a rise in the interest rate bill of around £20billion in 2025-26 would more than wipe out the £17billion the Chancellor hopes to raise that year through a hike in corporation tax.
‘Analysts said Sunak ‘was a hostage to fortune and the financial markets’.
Laith Khalaf at investment platform AJ Bell said: ‘Inflation concerns could yet blow a hole in the Chancellor’s best laid plans.’
Inflation has largely been kept under control in recent years, hovering at an average of 2.5 per cent over the past 12 years, close to the Bank of England’s 2 per cent target.
It is a similar story in the US and Japan where ageing populations have slowed economic activity and the rise of internet retailers have driven down the prices of every day goods.
The lack of inflation has allowed central banks to pump the markets with freshly created money in order to fight the financial crisis and the pandemic, but this era could be drawing to a close.
Nerves over mounting inflation have seen yields on UK ten year gilts rise from 0.2 per cent in January this year to 0.8 per cent.
In the US yields have risen from 0.8 per cent in November to 1.6 per cent last week. Yields rise when bonds are sold off.
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