Britain and France enter dangerous territory with mounting debts and looming fiscal crises

Last week’s public sector borrowing figures for the UK made for stark reading. June recorded a staggering £20.7 billion in borrowing, far overshooting both the Office for Budget Responsibility’s forecast and market expectations. Of that sum, a remarkable £16.4 billion was spent purely on interest payments for previous debts. Borrowing just to service older borrowings is a sign that the country is skirting the edges of what economists call “the debt trap”. This is the moment when debt interest payments are growing faster than the economy itself, threatening to send the country’s debt to unsustainable levels.

The dynamics of national debt are unyielding. If the government’s borrowing costs exceed the growth rate of the economy (taking inflation into account), then both debt interest payments and the total debt continue rising as a proportion of GDP. The only way to stabilise this dangerous trajectory is for the government to achieve a primary budget surplus—that is, more income than spending before debt interest is taken into account. This demands higher taxes, cuts to public spending, or both. The higher the starting level of debt, the tougher it becomes to reverse the trend.

Britain is not alone in these fiscal doldrums. France finds itself in even deeper waters. The French government’s debt to GDP ratio now stands at 113 percent, compared to the UK’s 100 percent. Its budget deficit is worse too—5.8 percent of GDP last year, whereas the UK managed 5.1 percent, with a further forecast to fall just below 4 percent this year. Growth prospects for both countries remain subdued and shrouded in uncertainty.

For now, France’s borrowing costs remain lower, with ten-year bond yields of about 3.5 percent versus the UK’s 4.6 percent. Yields across the eurozone have converged, with French rates barely higher than those of Italy—the smallest gap in two decades. If market sentiment deteriorates, there is a real chance that French borrowing costs could soon outpace those in Italy, which would mark a seismic shift in European fiscal stability.

Italy’s overall debt is higher at 135 percent of GDP, yet it boasts two significant advantages. The Italian deficit sits at 3.4 percent of GDP and, crucially, the country runs a primary budget surplus of 0.5 percent. France, in contrast, faces a primary deficit of 3.7 percent. Balancing the books will require France to tighten fiscal policy by more than 3 percent of GDP by 2027, while Italy’s task is a far more manageable 0.5 percent.

Stability in government is proving crucial. Italy, long known for political turmoil, is enjoying an unusual stretch of steadiness under Giorgia Meloni. France, on the other hand, has cycled through six prime ministers since 2020, and its minority government faces fierce opposition to any fiscal tightening. President Macron’s proposals to cut the deficit by 1.5 percent of GDP may never survive parliamentary gauntlets. Political instability, combined with the threat of the far-right National Rally claiming the presidency in 2027, could rapidly spook lenders, sending bond yields sharply upwards and pushing France toward a fiscal precipice.

The threats facing Britain and France may differ in the details, but the lesson echoes throughout the continent. Years of easy borrowing, low growth, and mounting interest payments are leaving nations dangerously exposed. The coming years will test their ability to restore confidence, stabilise debt, and chart a path away from the edge.