The British government is spending nearly twice as much on interest as on defence. That figure—£111.2 billion, or about $150 billion—is a stark metric of a problem facing not only Britain but most of the industrialised world: the end of cheap money is colliding with vast public debt.
Britain is not alone in its predicament. Debt across advanced economies has swollen to around 80% of GDP—double the level of 2007—and is still rising, according to the IMF. What makes the UK worth watching is its exposure. With no reserve currency to soften the blow and no eurozone backstop to cushion the market’s wrath, the country may be among the first to feel the full weight of fiscal gravity.
Rachel Reeves, the Labour chancellor, has dismissed talk of a crisis. Most economists agree—for now. Yet markets have grown twitchy. Yields on British 30-year gilts recently reached levels last seen in the 1990s. Ten-year borrowing costs now top those of the United States. Reeves is expected to return to parliament this autumn with proposals for fresh tax rises, following the biggest hike in a generation last year.
The logic is familiar and circular. Higher borrowing costs push up interest payments, which widen budget deficits, which then necessitate further tax rises or spending restraint—both of which depress growth and reduce revenues. And so the wheel turns.
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The roots of the problem stretch back two decades. Governments gorged on debt during a time of negligible interest rates. Then came Covid-19, followed by energy shocks and inflation. The Bank of England, like its peers, was forced to tighten. Central banks are now no longer helping governments fund their deficits; they are instead selling the bonds they once bought in vast quantities.
Britain’s situation is made more precarious by recent history. The chaotic 2022 budget under Liz Truss—featuring unfunded tax cuts and a cavalier disregard for fiscal math—triggered a spike in yields and a crash in sterling. Though the new government has sought to distance itself from that era, markets have not entirely forgotten. A small risk premium now hangs over British debt.
France, too, has found itself in fiscal difficulties. Its debt load, at 114% of GDP, outstips Britain’s. Ten-year French bond yields have reached 3.6%, surpassing those of Greece. Yet the underlying problem in France is political more than financial. The Bayrou government, attempting to rein in spending and eliminate public holidays to raise revenue, is facing a confidence vote on September 8th, and seems almost certain to lose. Fiscal repair has become a career-ending proposition.
The IMF believes France would need to raise its primary surplus (ie, before interest payments) to 1.2% of GDP to stabilise its debt. The task is not herculean. But the government currently runs a primary deficit of 4%. Bridging that gap would require measures worth around 5% of GDP—economically feasible, politically poisonous. The result is stasis: a stalemate between parties that agree deficits must shrink, but not on how or by whom.
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The UK faces similar gridlock, albeit with more fiscal orthodoxy. Reeves has promised discipline, but her plans to trim welfare have already been thwarted by restive MPs. A proposal to scrap fuel subsidies for the elderly was shelved. Welfare reform remains elusive. That leaves few options besides tax rises, which threaten to drag further on growth.
In contrast to France, however, Britain’s institutions may work in its favour. The Bank of England is unlikely to intervene to cap borrowing costs, but neither is it hamstrung by the need to balance interests across 20 member states. Nor is it beholden to a politically fragile coalition. The UK may therefore be forced to confront its fiscal problems sooner, and more honestly, than its peers. Robin Brooks of the Brookings Institution puts it bluntly: “It’s going to be a mess, it’s going to be painful, but the UK will at least confront the problem.”
The same cannot be said of the United States. There, debt has passed 120% of GDP, and interest payments have surpassed defence spending. Yet the dollar’s reserve status allows Washington to borrow with impunity. So far.
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That impunity may not last. Net global interest payments rose 11.2% last year to $2.72trn, according to the IMF. The burden will grow heavier as ageing populations strain pension and healthcare systems. By the early 2070s, the UK’s debt is projected to strike 270% of GDP, more than Japan’s today.
At some point, rich countries may have to choose between higher taxes, lower spending or sharply yanking up borrowing costs. For now most are choosing to wait. Britain’s misfortune is to be among the few that cannot.
Whether this proves an early warning will depend on how others respond. Politicians elsewhere may hope to put off difficult decisions until growth returns or inflation fades. But the markets may not wait that long. Britain, for all its peculiarities, may simply be first in the queue.
Those looking to avoid the same fate might do well to pay attention. The canary has begun to cough. ■
