UK debt interest will soar to £104bn next year – IFS

By Mark McSherry

The Institute for Fiscal Studies (IFS) has warned that high inflation will cause interest payments on the UK government’s debt in 2023-24 to rise £54 billion to £104 billion.

“Debt interest spending will be pushed up by a higher RPI and higher interest rates …” said the IFS.

“The two candidates for Prime Minister also need to recognise the even greater than usual uncertainty in the public finances.

“Additional borrowing in the short term is not necessarily problematic – and indeed may be appropriate to fund targeted support.

“But large permanent tax cuts would exacerbate already substantial pressures on the public finances – as spelled out by the OBR only last month – unless matching spending cuts can be delivered.

“In reality significant spending increases are likely to be needed in face of high inflation.”

The IFS said that in 2023–24 UK borrowing is forecast to increase by £23 billion, simply through additional spending on social security benefits and state pensions — up £4 billion on current forecasts to £275 billion — and debt interest up £54 billion to £104 billion, only partially offset by higher revenues, up £34 billion.

“There will be additional pressures, likely running into tens of billions, to continue to support households and to compensate public services for high inflation,” said the IFS.

“If inflation falls back to normal levels by 2024–25, then debt interest spending will fall.

“Higher tax revenues and increased spending on benefits and pensions could largely offset one another by then, leaving borrowing broadly in line with the OBR’s March forecast.

“But pressures on public services will be more acute, and higher spending than planned seems almost inevitable.

“And the uncertainty around tax revenues is particularly pronounced, and will crucially depend on the length, depth and pattern of any period of economic weakness.”

The stark numbers are contained in new research from the IFS, which is an early output from the 2022 IFS Green Budget report produced in association with Citi and funded by the Nuffield Foundation.

Its central projections for next year use the Bank of England’s new forecasts for inflation and growth.

IFS Deputy Director Carl Emmerson said: “The reality is that the UK has got poorer over the last year.

“That makes tax and spending decisions all the more difficult.

“It is hard to square the promises that both Ms Truss and Mr Sunak are making to cut taxes over the medium-term with the absence of any specific measures to cut public spending and a presumed desire to manage the nation’s finances responsibly.”

In a briefing note, the IFS added: “Social security benefits and state pensions will automatically be pushed up by higher inflation: we forecast that spending on these items in 2024–25 will reach £300 billion, £16 billion higher than forecast by the OBR in March.

“Debt interest spending will be pushed up by a higher RPI and higher interest rates.

“We forecast that debt interest spending in 2023–24 will be over £100 billion, some £50 billion higher than forecast by the OBR in March.

“But as long as inflation subsequently drops back, we would expect much of the increase in debt interest spending to then fade leaving it ‘only’ £21 billion above the March forecast in 2024–25.”