Why is interest on Government Debt rising?

[AsleepInYorkshire]

Inflation pushes UK government interest costs in June to fresh record

Surging inflation led interest payments on UK government debt to hit the highest amount on record in June.

I thought large amounts of the UK's debt was at very low interest rates. Are they variable rates?

AiY(D)
Also as the BoE now controls interest rates and the Government taxes, does this give government a way of "manipulating" the impact of interest rate rises through tax changes?

[gryffron]

The Bank of England controls base rates. That's the interest rate for money lent FROM govt/BoE to banks etc.

Govt gilts are sold at auction to the lowest bidder. So neither the govt nor BoE has any control of the rates at which money is lent TO the govt. That's up to the market. Graph here showing recent increases. https://tradingeconomics.com/united-kin ... bond-yield

The above two rates will not be the same, although there will be some correlation between them.

So why has it gone up?

Some govt debt is National Savings. And although they haven't been available for new money for very many years, there are still some RPI and CPI linked bonds out there. The cost of those rises directly with inflation.

Much of the govt debt has been refinanced at low 30 year rates. But NEW debt will need to pay the market rate, and there will still be some rollover from 30 years ago requiring refinancing, so the increases will be reflected (slowly) in current spending.

Why is it the highest ever?

Cos the economy is the biggest ever. The population is the biggest ever. The pound is worth less than ever. So the debt in absolute terms is the biggest ever, by a substantial margin. So even a small change in interest rates makes the repayments the biggest ever.


Also note about 1/3 of UK govt debt is held by the BoE, i.e. The government. So the govt pays interest to itself!

Gryff

[GoSeigen]

Inflation pushes UK government interest costs in June to fresh record

Surging inflation led interest payments on UK government debt to hit the highest amount on record in June.

I thought large amounts of the UK's debt was at very low interest rates. Are they variable rates?

AiY(D)
Also as the BoE now controls interest rates and the Government taxes, does this give government a way of "manipulating" the impact of interest rate rises through tax changes?

1. The article you linked to says:

The recent high levels of debt interest payments are largely a result of higher inflation, the Office for National Statistics (ONS) said.

This is due to the interest paid on government bonds rising in line with the Retail Prices Index measure of inflation, which hit 11.8% in June.

2. Gilt yields have been rising since last year. This affects new issuance.

3. Also, you may not have noticed but a. the UK economy has been growing ever since the records you refer to began in 1993 and b. the UK's outstanding government debt has been soaring for the entire period since May 2010.

4. "I thought large amounts of the UK's debt was at very low interest rates. Are they variable rates?" Yes, a huge proportion of the debt has been monetised by QE and so the variable interest paid may well exceed interest received by the Asset Purchase Facility as interest rates rise.

The above factors together contribute to the record interest payments for June.

GS

[Hallucigenia]

I thought large amounts of the UK's debt was at very low interest rates. Are they variable rates?

They vary, but maybe not in the way you think. Some of them are inflation-linked, so the interest paid varies but is completely out of government hands. But almost all are fixed-rate. And they're almost all fixed-term, which means that gilts are constantly expiring and being replaced with new ones at a fixed rate - which is determined by the market at the time.

So they might have issued £1bn of 10-year gilts in July 2012 at a fixed rate of 1.5%, but in order to pay off the £1bn needed to redeem the 2012 gilt, they have to issue £1bn of 10-year at 2.2% in July 2022 because that's the current market rate. Net effect is that they're now paying an extra £7m/year of interest on that same £1bn of debt, just because it had to be rolled over.

[Alaric]

I thought large amounts of the UK's debt was at very low interest rates. Are they variable rates?

I could suspect that there's something we aren't being told. Certainly there's UK debt issued on indexed terms. In terms of the annual servicing, recent issues have been at very low coupons and they are "only" going to increase year on year by the movement in the relevant Prices Index. So that's not much more than a 10% increase between one year and the next and not something to be particularly noticeable as a spike.

Rather I ask myself how the Government does its accounting. When it issues Indexed Debt, does it work out the cost of revaluation and add it back each year to the original amount borrowed? Does it on the other hand ignore the revaluation and put the amount through the books only when the maturity date is reached. If the latter is the case, then periodically there are going to be these chunky "interest" payment. That's akso saying that the amount of total Government borrowing is higher than the usual statistics indicate, there being an unstated accrual of the revaluation.

Note - Indexed borrowing is repaid as (Amount originally borrowed) times (Relevant Price Index at Maturity) divided by (Relevant Price Index at Issue)
sai

[Alaric]

So they might have issued £1bn of 10-year gilts in July 2012 at a fixed rate of 1.5%, but in order to pay off the £1bn needed to redeem the 2012 gilt, they have to issue £1bn of 10-year at 2.2% in July 2022 because that's the current market rate. Net effect is that they're now paying an extra £7m/year of interest on that same £1bn of debt, just because it had to be rolled over.

All that's correct, but a 2022 rollover doesn't impact interest payments until 2023. Are there rollovers of indexed debt this year?

Interest on debt does catch up with you. Back in the 1970s, the Government, when Healey was Chancellor, borrowed at 15%. That meant for every £ 1000 borrowed, they would have to increase Government spending financed either by tax or more borrowing by £ 150 the following year.

[mc2fool]

Certainly there's UK debt issued on indexed terms. In terms of the annual servicing, recent issues have been at very low coupons and they are "only" going to increase year on year by the movement in the relevant Prices Index. So that's not much more than a 10% increase between one year and the next and not something to be particularly noticeable as a spike.

Well I dunno, with fully a quarter of government debt being index-linked and inflation going up to 11% (linkers are on RPI) it could well be noticeable!

Anyone want to actually crunch the figures? Start here I guess: https://www.ons.gov.uk/economy/governme ... y2022#debt

Rather I ask myself how the Government does its accounting. When it issues Indexed Debt, does it work out the cost of revaluation and add it back each year to the original amount borrowed?

The above link says "£502.1 billion are index-linked gilts that pay an interest rate pegged to the Retail Prices Index (RPI) and are recorded at their redemption value". Not quite sure how they do that when the redemption value can't be known in advance. Maybe based on some model of future inflation?

[dealtn]

Rather I ask myself how the Government does its accounting. When it issues Indexed Debt, does it work out the cost of revaluation and add it back each year to the original amount borrowed?

Irrelevant to a discussion on interest as you are talking about Capital

Does it on the other hand ignore the revaluation and put the amount through the books only when the maturity date is reached. If the latter is the case, then periodically there are going to be these chunky "interest" payment.

No because again that is Capital, not interest.

That's also saying that the amount of total Government borrowing is higher than the usual statistics indicate, there being an unstated accrual of the revaluation.

No. Government debt is consistent with the Euro wide Manual on Government deficit and Debt

https://ec.europa.eu/eurostat/documents ... 9a66f2e00c

The relevant part is Section 8 but Debt Liabilities are measured at market value, and adjusted for inflation (in the case of index linked securities)

[Hallucigenia]

All that's correct, but a 2022 rollover doesn't impact interest payments until 2023. Are there rollovers of indexed debt this year?

I think you're being unnecessarily literal - I think the original article is just worrying about the three-month lag on index-linkers, which takes us back to March when inflation started spiking.

As an aside though, the DMO has just had a bunch of "good" redemptions, like a 1996 25-year at 8%, but in the next year they have £109bn of "bad" redemptions of 0.125%-1.75% starting tomorrow, per D1A

Name/ISIN/Redemption/Issue/Payout dates/£m in issue
8% Treasury Stock 2021 GB0009997999 07-Jun-2021 29-Feb-1996 7 Jun/Dec 26-Nov-2020 24,594
3¾% Treasury Gilt 2021 GB00B4RMG977 07-Sep-2021 18-Mar-2011 7 Mar/Sep 26-Aug-2020 29,001
4% Treasury Gilt 2022 GB00B3KJDQ49 07-Mar-2022 27-Feb-2009 7 Mar/Sep 26-Aug-2020 38,771
0½% Treasury Gilt 2022 GB00BD0PCK97 22-Jul-2022 03-Aug-2016 22 Jan/Jul 13-Jul-2020 29,260
1¾% Treasury Gilt 2022 GB00B7L9SL19 07-Sep-2022 22-Jun-2012 7 Mar/Sep 26-Aug-2020 29,682
0 1/8% Treasury Gilt 2023 GB00BL68HG94 31-Jan-2023 08-Apr-2020 31 Jan/Jul 22-Jul-2020 16,011
0¾% Treasury Gilt 2023 GB00BF0HZ991 22-Jul-2023 20-Jul-2017 22 Jan/Jul 13-Jul-2020 33,731
2¼% Treasury Gilt 2023 GB00B7Z53659 07-Sep-2023 12-Jun-2013 7 Mar/Sep 26-Aug-2020 32,015
1% Treasury Gilt 2024 GB00BFWFPL34 22-Apr-2024 25-Jul-2018 22 Apr/Oct 13-Oct-2020 34,205

[mc2fool]

Supposed economics expert on Ch4 News tonight explained that the interest payments on government debt had gone up 'cos the interest on a lot of government debt is linked to inflation. Well ok I thought, that's not actually right but it is a common way of expressing it.

But he then went on to say that when inflation came down the interest payments would come down too ...