UK faces highest debt interest costs in developed world

investmentweek.co.uk:

Inflation index-linked debt accounted for almost 25% of UK government debt stock in 2023.

Britain will spend 10.4% of total government revenue servicing its debts in 2023, Fitch has forecast, at a total of £110bn.

Interest payments on a 12-month basis reached £117bn in May 2023, double the level in the period to September 2021. 

This reflects the high proportion of inflation-linked debt in the UK, Fitch said, which sped up the pass-through from inflation to interest costs despite the long average maturity of government debt. 

Inflation index-linked debt accounted for almost 25% of UK government debt stock in 2023. The next largest issuer of inflation-linked debt among the G7, Italy, had just 12%. France was the only other member with a level of over 10%.

Record debt and higher interest rates set to double government borrowing costs by 2025

Debt interest costs as a proportion of revenue are a key measure of debt affordability and have jumped in the UK in the past couple of years while coming down elsewhere. 

Fitch expects the increase in interest rates associated with the rise in global inflationary pressure in 2022 to affect most sovereigns around the world.

However, the rise in interest costs will be greater for developed markets than for emerging markets, in part because developed markets benefited more from low borrowing costs previously. 

It also reflects Fitch's base case assumptions, under which developed market central banks are projected to raise interest rates further in the second half of 2023, in response to high and persistent levels of core inflation. 

Differences among emerging markets may be greater, the ratings agency said, but it believes many emerging market central banks will keep rates on hold