The UK is facing the highest public debt interest costs among developed nations this year, mainly due to its significant share of inflation-linked debt, Fitch Ratings said on July 25.
The UK will now lead the Fitch debt interest costs table after its ratio grew dramatically over the past two years to 10.4% from an average of 6.2 % between 2017 and 2021. According to Fitch forecasts, Britain will -allocate £110 billion ($141.9 billion), - 10.4% of its total government revenue to service its debts in 2023. Roughly 25% of UK government debt is attributed to so-called index-linked bonds, whose payouts are contingent on inflation, making the country stand out internationally. Italy has the next highest proportion of 12 % of its bonds tied to inflation, while most countries have less than 10%.
Rising debt costs and stubborn inflation in the UK have proved to be more resistant to tightening measures than other wealthy economies, despite the cooling pace of inflation. The UK’s retail price index, used as a gauge for index-linked gilt interest payments, climbed 10.7 % year-on-year in June, while wage inflation has not indicated any signs of easing.
Rating agencies expect the UK’s interest costs to stabilize at historically high levels. “We expect the debt affordability of the UK to remain relatively weak,” Evan Wohlmann, a senior credit officer at Moody’s said to Financial Times.
Concern among rating agencies on the UK’s credit prospects followed a released warning by the Office for Budget Responsibility, the UK’s fiscal watchdog, that stated that public finances were in a “very risky” position, with government debt on track to mark 310 % of the gross domestic product in 50 years. The OBR said the UK was “more vulnerable” than other advanced economies in terms of public debt, which in May surpassed 100 % of gross domestic product for the first time since 1961.
Fitch expects the increase in interest rates linked with the upsurge in inflationary pressure in 2022 to have a global impact on most sovereign economies. However, the developed markets will be more affected by the rise in interest costs than emerging markets, partially because in previous years, developed markets engaged in low-cost borrowing on a much larger scale than emerging markets.