(Bloomberg) -- From the financial crisis to Russia’s invasion of Ukraine, Britain has borrowed and spent its way out of every jam. The bill for that is becoming a worry all its own.
The UK’s public debt load has soared by more than 40% to almost £2.6 trillion since the pandemic struck, leaving the country owing more than its entire annual economic output for the first time since 1961. A heavy reliance on index-linked bonds at a time of high inflation also means Britain will pay more to service liabilities than any other advanced economy.
Sunak and his main rival for the prime minister’s job after an election expected next year — Labour leader Keir Starmer — have few options. Economic growth is forecast to remain flat through next year, the National Health Service is stretched to breaking point and the tax burden is already at a 70-year high.
Unlike the US, the UK has no unblemished status to lose. Moody’s and Fitch stripped the country of its top rating a decade ago, followed by S&P in June 2016, days after Britons voted to leave the European Union. The UK still enjoys an investment-grade rating with all three agencies. “The UK is more susceptible to sudden debt-sustainability concerns because the pound, unlike the US dollar, is not the world’s dominant reserve currency,” said Sam Zief, head of foreign-exchange strategy at J.P. Morgan Private Bank. “Debt sustainability doesn’t impact markets until it does.”
“If inflation becomes entrenched, this will become more of an issue,” said Eiko Sievert, director of sovereign and public sector at Scope Ratings. “If the expectation is that next year we could have a very sharp fall in inflation pressures, then this whole debate around index linked gilts being a severe burden on public finances will become more muted.”
That will cost taxpayers around £10 billion, according to online investment service Interactive Investor. Surging numbers of sick working age benefit claimants will cost the state another £15 billion in lost taxes and higher welfare, the government’s independent forecaster said last month.
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