SOGEI website background

The outlook for debt interest spending

Debt interest is one of the largest elements of public spending not under the direct control of government. It is determined by the stock of government debt – mostly the legacy of past budget deficits – and the interest rates that the government has to pay on it. Economic or fiscal developments that raise future budget deficits, or the debt stock directly, would increase future debt interest spending. But increases in the cost of new borrowing are an important additional risk, not just because they would make it more expensive to service a given debt, but also because they could push the debt-to-GDP ratio towards an unsustainable trajectory if they rise relative to the rate of growth of nominal GDP. The UK public sector paid £39.4 billion of debt interest to the private and overseas sectors in 2016-17, comprising £35.2 billion from central government, £3.4 billion from public corporations and £0.7 billion from local authorities. At 2 per cent of GDP, this is relatively modest by the standards of recent decades (Chart 1.1). The public sector, in its turn, received £5.8 billion of interest payments from the private and overseas sectors, including accrued interest on student loans and interest on its foreign exchange reserves.