UK government bonds are viewed as safe and dependable investments by financial institutions because of the government’s ability to repay them. But at a time when the government is grappling with a debt burden of around £2.59tn ($3.42 tn), a 20-year high in its interest payments poses a significant challenge for Chancellor Jeremy Hunt as he prepares to announce his Autumn Statement on 22 November.
A rise in the cost of borrowing would have a knock-on effect on the government’s bottom line as it raises the cost of servicing its debt pile. This essentially means that the chancellor has less money to allocate to the country’s public services, such as schools and healthcare, and to match the clamour for pay raises to help workers cope with rising costs.
The higher rate of interest on the government’s debt pile could require the Treasury to set aside an additional £23bn a year to meet interest payments, which could further limit spending in these areas, according to the Institute for Fiscal Studies.
There is concern among some economists that the government is borrowing too much at a high cost. The government’s official economic forecaster, the Office for Budget Responsibility, has warned that public debt could skyrocket as the population ages and tax income falls
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