Debt interest payments soar as inflation bites

TAXPAYERS will be forced to stump up nearly £185bn in interest payments over the coming years to service Britain’s towering national debt.

The debt stands at over £2.2trillion and will surpass £2.5 trillion in 2023, according to forecasts from the Office for Budget Responsibility (OBR).

It stood at less than £500bn in 2005 but ballooned during and after the financial crisis, hitting £1 trillion in 2011 and £1.5 trillion in 2016.

The Covid-19 pandemic sent it soaring again as tax receipts slumped and the Government spent billions on support measures such as the furlough scheme.

The OBR said it now expects debt interest payments to total £36bn this year – well above the £19.9bn pencilled in just seven months ago. Only four Government departments – Health & Social Care, Education, Defence and Scotland – will cost taxpayers more this year.

Next year’s bill also looks set to rise from the £19.4bn forecast in the March Budget to £33.7bn. Overall, taxpayers will cough up a whopping £184.5bn in debt interest payments over the next six years, according to the OBR.

Rising inflation and interest rates mean servicing the debt will be far more onerous than expected at the time of the last Budget in March. Rishi Sunak yesterday said the public finances were ‘twice as sensitive to changes in interest rates as they were before the pandemic and six times as sensitive as they were before the financial crisis’.

He added that an increase in inflation and interest rates of just one percentage point would cost the British coffers ‘around £23bn’.

The comments underline concerns in the Treasury about rising inflation ahead of a meeting of the Bank of England next week, which could see the central bank raise interest rates from their current record low of 0.1pc.

Expectations of a hike were fuelled by comments from Governor Andrew Bailey earlier this month, who said the bank ‘will have to act’ if inflation threatens to run out of control.

The OBR warned that inflation will peak ‘at close to 5pc next year’ but added: ‘It could hit the highest rate seen in the UK for three decades.’

Analysts warned that rising interest could derail Sunak’s plans to balance the books and cut taxes ahead of the next general election.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: ‘The Chancellor’s scope for pre-election tax cuts might be reduced by rising debt interest payments.’