Politics
The IMF and the OECD Warned Britain About Debt in the Same Week
— 4 mins read
Debt interest is forecast to return to mid-1980s levels as a share of national output.
Two international bodies issued warnings about British public finances within two days of each other this week, and both landed on the same subject.
On Tuesday, Kristalina Georgieva, managing director of the International Monetary Fund, told the BBC that a succession of global shocks had pushed debt levels up "like a staircase not to heaven", and that governments had taken "no action to contain that service cost". It was time to act, she said, and doing so would require courage from politicians.
On Wednesday the OECD published its interim economic outlook, trimming its forecast for UK growth in 2027 from 1.1 per cent to 1 per cent. Britain had proved more resilient than expected this year, and the 2026 figure was revised up from 0.9 to 1.1 per cent. The downgrade for next year reflects higher fuel and energy costs driven by the conflict in the Middle East and the war in Ukraine.
The growth revision is small. The debt position is not.
Back to the mid-1980s
Ruth Gregory, deputy chief UK economist at Capital Economics, told the BBC that debt interest payments, measured as a share of the UK's economic output, are forecast to reach levels last seen in the mid-1980s.
That is the number worth holding on to. Inflation held above target by the energy shock has pushed up what the government pays to borrow, and an unexpected surge in borrowing in August added to the pressure. Money spent servicing debt is money that cannot be spent on anything else, and it is claimed before any minister gets to choose.
Money spent servicing debt is money that cannot be spent on anything else, and it is claimed before any minister gets to choose.
Gregory also cautioned against reading too much into Britain's resilience so far. Businesses had built up stocks and households had cut back on saving, both of which cushioned the impact of higher energy prices. Neither lasts. The drag on the economy will increase, she said, and growth next year will be more muted.
The Prime Minister's bind
Andy Burnham acknowledged on Wednesday that Britain's high level of borrowing had left it "over-exposed" to global shocks. He also stood by a remark he made a year ago, that Britain should be less "in hock" to investors in the bond markets, comments that unsettled those investors at the time because they were read as an argument for loosening spending restraint.
He and his Chancellor now have to reconcile several things that do not obviously fit together. Burnham has made easing household costs a central commitment. The government is under pressure to increase defence spending. Labour's manifesto commitments on tax remain in place, as do the government's own fiscal rules. The House of Lords Library sets out the arithmetic in detail.
Emma Reynolds, Chief Secretary to the Treasury, said the economy was showing strong resilience despite unprecedented pressures and conflict in both the Middle East and Europe, and that the government was "already giving families space to breathe" while starting the long-term changes needed to create jobs and growth.
Andrew Griffith, the Conservative shadow chancellor, said the OECD urges countries to "control spending and improve public sector efficiency", and that the government was instead looking for new ways to tax people while paying the highest borrowing costs in the G7.
Where the pressure is coming from
The mechanism is oil. Conflict in the Middle East and the war in Ukraine have pushed up crude prices, which feeds into fuel and energy costs and from there into inflation across the world economy. How much damage is done next year depends on how long supply disruptions last. The OECD noted that stockpiles, and supplies from outside the Gulf states, have softened the impact so far.
Ryanair offers a concrete illustration. The airline's fuel bill could rise by $1.5 billion next year to $7.5 billion. Michael O'Leary, its chief executive, said ticket prices next summer will be "materially higher" and described the position facing carriers as almost unprecedented.
Britain is not alone. Global growth next year is expected to come in 0.1 percentage points lower than previously forecast, with Australia, Canada and the euro area also revised down, City AM reported. The OECD also flagged weaker than expected returns on AI investment, climate-related supply shocks, and a strong El Niño that could hit harvests and push food prices up. New US tariffs introduced in July have raised the effective tariff rate by 1 per cent, adding further uncertainty to trade.
Britain is not alone. Global growth next year is expected to come in 0.1 percentage points lower than previously forecast, with Australia, Canada and the euro area also revised down.
Five weeks
John Healey delivers his first Budget on 28 October.
Every commitment in it is a claim on money that has to come from somewhere: tax now, borrowing later, or a pound that buys less. Two international institutions have now said, in the same week, that the third option is already costing Britain more than it can comfortably afford.
