The UK faces an eye-watering debt interest bill of nearly £600 billion over the next five years, according to the Office for Budget Responsibility (OBR), as the government contends with soaring borrowing costs, weak economic growth, and mounting fiscal pressure.
The stark projection was released alongside Chancellor Rachel Reeves’s spring statement, which included a £14 billion package of cuts to restore lost fiscal headroom. The move came in response to rising bond yields and a downgrade to the UK’s growth outlook.
Researchers at the OBR estimate that debt interest payments will exceed £100 billion every year until 2030 — a level not seen before — with the total approaching the size of the UK’s entire economy. The organisation has also halved its growth forecast for 2025 from 2 per cent to 1 per cent and warned that inflation could climb to 3.8 per cent this summer, up from 2.8 per cent in February.
Despite the grim outlook, bond markets responded positively to the Debt Management Office (DMO)’s updated issuance plan, which revealed that it will issue £299 billion of UK government debt this year — lower than the £310 billion anticipated by markets. The yield on the 10-year UK gilt edged down three basis points to 4.721 per cent, as investors took comfort in the more moderate supply outlook.
James Smith, developed markets economist at ING, said: “While that’s still a huge number by historical standards, some had feared we’d see another significant rise versus October’s plans.”
Michael Sheehan, of EdenTree Investment Management, added: “The market welcomed the DMO’s bond sale forecast with open arms. With a lower-than-forecast inflation print this morning and a favourable debt issuance outlook, we would expect a recovery in the underperformance seen so far this year in gilts.”
To reduce long-term exposure to today’s elevated interest rates, the DMO is increasing the issuance of shorter-dated bonds, providing more flexibility should rates begin to fall later in the year.
The pound dropped 0.45 per cent against the dollar to $1.28 and 0.11 per cent against the euro to €1.19. Meanwhile, the FTSE 100 rose by 0.30 per cent to close at 8,689.59, and the FTSE 250 gained 0.29 per cent to 20,039.
Falling inflation figures earlier in the day gave markets further encouragement. The unexpected drop in the headline rate from 3 per cent in January to 2.8 per cent in February has raised expectations that the Bank of England could begin cutting interest rates as early as May 8, when it publishes its next round of economic forecasts. Rates were held steady at 4.5 per cent in the latest meeting.
Still, the economic risks remain. The OBR cautioned that Chancellor Reeves could face a £50 billion hole in the public finances if productivity growth falls short of forecasts — a risk that could further complicate the government’s efforts to bring borrowing under control.
While the bond markets breathed a sigh of relief on the day, the broader picture is one of growing concern: a record debt interest burden, sluggish growth, and a tightrope fiscal strategy that leaves little room for error.
