UK has highest interest debt bill in the developed world

The UK will have the highest interest rates in the developed world for the year due to persistently high inflation, and a large number of government bonds tied to price increases.

Fitch forecasts that the Treasury will spend £110bn in debt interest by 2023. The UK would have the highest debt interest rate of any country with a high income, at 10.4% of the total government revenue. This is the first time that the UK has been able to top the data dating back to 1995.

Around a quarter (25%) of UK government debt comes in the form index-linked bonds. These are bonds whose payments fluctuate with inflation. This makes the UK a major outlier in international comparisons. Italy is the second highest with 12 percent of its bonds linked to inflation. Most countries have less that 10 percent.

Ed Parker, Fitch’s global head of sovereign and supranational research, said: “We have experienced a large inflation shock that has adversely affected the public finances. This is a major driver for the sovereign credit rating.”

In June, the agency reiterated its negative outlook for the UK’s Double A-minus credit rating. It cited “the UK’s increasing government debt and uncertain fiscal consolidation prospects”.

Parker said that a downward trend is “more than likely” if the current trends continue. The agency would hope to clarify any negative outlook in two years.

The debt interest cost as a percentage of income is a key measure for debt affordability. It has risen in the UK over the last couple of years, while falling elsewhere.

The UK’s interest rates on debt have increased dramatically over the last two years, from an average of 6.2% of revenue in 2017 to 2021. Fitch ranked Iceland as the highest-ranking country because Iceland, which had an average debt cost ratio (DCR) of 11% last year, is on track to reduce it to 9.6% in 2023. Fitch attributed this expected improvement to the strong economic growth that has increased the Icelandic government’s tax revenue. Inflation has increased government revenues, and in some countries, the interest rates on the old debt are higher than the new debt.

The UK is experiencing higher debt costs as inflation remains stubbornly high despite recent data showing signs of improvement. The UK retail price index which is used to calculate index-linked gilt interests in the UK rose by 10.7% over the past year. Wage inflation, however, has not shown any signs of slowing down.

Fitch predicts that the UK’s interest-to-revenue debt ratio will begin to decline next year, as inflation continues its downward trend. The US and Italy are expected to surpass the UK by 2024.

Rating agencies, however, expect interest rates in the UK to stabilize at historically high levels. Evan Wohlmann is a senior credit analyst at Moody’s, which has a rival rating agency. He said that they expect UK debt affordability to remain weak.

He added that “debt affordability could be at risk due to persistent inflation and a possible sustained erosion of UK policy credibility”.

Moody’s has also a negative outlook. It has been holding this position since October, and is expected to clarify it within the next 12 months.

Rating agencies are concerned about the UK credit outlook after the Office for Budget Responsibility (UK’s fiscal watchdog) warned that the public finances were “very risky”, with the government debt set to reach 310 percent of the gross domestic product within 50 years.

The OBR stated that the UK is “more vulnerable” when it comes to public debt. In May, the UK’s public debt exceeded 100 percent of its gross domestic product (GDP) for the first since 1961.

The government intends to sell £241bn of Gilts in the current fiscal year. This is a significant increase over the £139.2bn that was issued in the preceding 12 months.