IFS - Increases in RPI inflation set to add 11bn to debt interest spending

From: Think Tanks
Published: Thu Feb 17 2022

Isabel Stockton, a research economist at the IFS, responded to the RPI inflation data

"The last decade has seen debt interest spending consistently come in below forecast, and often by a significant margin. That pattern is set to reverse. These figures show that annual RPI inflation now stands at 7.8%, well above what was forecast in the October Budget, and this will push up the cost of servicing index-linked debt. As a result we now project that central government spending on debt interest this financial year will come in at around 69 billion, some 11 billion higher than the 58 billion forecast in the October 2021 Budget and 27 billion above the 42 billion forecast in the March 2021 Budget. Looking ahead into 2022-23, the October Budget forecast that debt interest spending would be 53 billion. The increase in the outlook for the RPI since then could easily add another 12 billion to this figure.

"While unwelcome for the Chancellor, spending 69 billion on debt interest in 2021-22 would only leave this spending at the average share of national income seen over the period since 2000. This is below its share of national income prior to that. But while debt interest spending is not particularly high by historical standards, this does not mean the increase in debt through the pandemic - and before that, through the financial crisis - has been costless. Far from it. The Government's finances are now more exposed to rises in the cost of servicing its debt, and it remains to be seen whether the recent sharp increases will be outweighed by stronger revenues, which would limit the pressure they put on the public finances. Energy price-driven increases in the RPI are one source of this increase in servicing costs. Another could come from continued increases in Bank Rate set by the Bank of England that are faster than forecast at the Budget, which would push up the cost of the reserves that have been generated under its programme of quantitative easing."

The statistical bulletin from the ONS can be found here.

Company: Think Tanks

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