Debt interest bill set to reach £160bn as gilt yields rise

Government debt interest is forecast to climb to £160 billion a year by 2031-32, up from £109 billion in 2025-26, according to the forecasts behind the Budget delivered on 28 October.

The Office for Budget Responsibility said that figure would equal 4.2% of national income, against 3.5% in 2025-26.

Debt interest was £39 billion, or 1.7% of GDP, in 2019-20, so the bill is forecast to be roughly four times its level at the start of the period.

The OBR said the rise in interest rates and a higher inflation forecast leave borrowing before policy measures an average of £11 billion a year above its March forecast.

The Resolution Foundation said that increase is entirely explained by higher debt interest costs, and its chief executive Ruth Curtice commented on the outlook for living standards.

She said: “None of what was announced today is likely to shift the dial on what is set to be a truly terrible decade for living standards.”

The Treasury said the OBR expects the UK to pay an average of £14 billion a year more in debt interest than in its spring forecast, following the conflict in the Middle East.

The Resolution Foundation, in its analysis of the Budget, said the forecast bill for 2029-30 is £147 billion, £13 billion more than in March.

The Treasury said higher debt interest costs from the conflict more than account for the fall in headroom against its stability rule in 2029-30 since the spring.

The Resolution Foundation put the remaining headroom at £14.5 billion, about three-fifths of its March level.

The OBR said a 1 percentage point change in gilt yields and Bank Rate expectations could alter medium-term borrowing by £16 billion.

It added that ten-year gilt yields have ranged from around 4.5% to 5.5% since March, which it called not unusual by historical standards.

The Resolution Foundation said borrowing costs kept rising after the OBR closed its forecast, and that the peak of recent weeks would imply about £2 billion of extra debt interest.

The foundation said decisions on departmental spending were largely deferred, and that unprotected departments such as Justice, Transport and Work and Pensions face real cuts of 6.7%, or £12 billion, by the end of the forecast.

On household taxes, the OBR said frozen income tax thresholds, combined with higher nominal earnings growth, are among the factors behind its forecast of a slight near-term fall in real household disposable income per person.

The Resolution Foundation said the Budget raised tax rates on savings and property income by 2 percentage points as permanent revenue measures.

It said typical non-pensioner incomes are set to fall by 3.0%, or £1,050, between 2026-27 and 2028-29.

Real household disposable income per person is £420 lower than two years ago, the foundation said, and will not recover until April 2029.

The foundation said key decisions on public services funding have been put off until next year’s Spending Review.