Capital Economy, Business and Finance
The UK is heading towards a “self-reinforcing debt deterioration cycle” in which high interest payments lead to increased public borrowing. That’s the assessment of hedge fund manager Ray Dalio, but the reality looks more complicated.
The UK’s deficit for December came in over expectations at £17.8 billion, more than double a year earlier and the highest for any month since the pandemic.
Debt interest costs have indeed jumped, but analysis from the Office for Budget Responsibility shows that large public sector pay rises, local authority borrowing and welfare payments are also adding to running costs – while tax receipts are faltering.
Ten-year gilt yields have dropped 0.3 per cent in the past week, offering some respite for Chancellor Rachel Reeves.
A bigger concern is whether she is on an uncorrectable course towards breaking her own fiscal rule, which requires day-to-day spending to be covered by tax revenue by 2029-30.
