Bond yield rise will swell national debt
RiSiNG government borrowing costs look set to add billions of pounds to interest payments on t he UK national debt over the next five years.
The ten-year gilt yield – a benchmark measure of how much the state pays to borrow – hit 3pc last week as the recovery in the economy picked up.
That was the highest level since July 2011, more than double the rate seen last summer and well above the 1.87pc level at the time of the Budget in March.
Last night a source close to Chancellor George Osborne conceded that it was ‘mathematically unavoidable’ that higher borrowing costs will feed through to higher debt interest payments. But it is hoped that the economic revival will also lead to stronger tax receipts and lower spending on out- of-work benefits – more than making up for the rising cost of servicing the ballooning national debt.
George Buckley, UK economist at Deutsche Bank, said: ‘if gilt yields are rising because they reflect a much stronger economy than was expected, then in turn that should bring in greater revenues to the exchequer and reduce spending on welfare.
‘This will help offset the impact of the rise in gilt yields on interest spending.’
Treasury figures published in the Budget show that a one percentage point increase in government bond yields would increase debt interest payments by £800m this year to more than £50bn. if gilt yields remain one percentage point higher than expected for the next five debt interest payments in 2017-18 would be £8.1bn higher than hoped, at £79.4bn.
The total bill over the next five years would rise by £22.1bn to around £320bn – or nearly £13,000 per household. ‘This is why it is so important to get our debts under control,’ the Treasury source said.
Bond yields have risen as investors bet that the revival in the UK economy will force the Bank of england to raise interest rates sooner than expected.
Borrowing costs have also been driven higher by speculation that the US Federal Reserve is preparing to bring the era of cheap money to an end on the other side of the Atlantic.
Ministers are hoping that the improved outlook for the UK economy will f eed through to lower borrowing as tax receipts pour in and welfare spending falls.
The annual deficit has fallen from the record £157bn racked up by Labour in 2009/ 10, i ts final year in office, to £116.5bn last year, but progress has stalled.
The government borrowed £ 36.8bn i n the first four months of the 2013/14 fiscal year compared with £35.2bn at this stage of 2012/13.
The national debt – below £350bn a decade ago – has now hit £ 1.19trillion or 74.5pc of national income and i s on course to hit £1.64trillion in 2017/18.