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The Office for Budget Responsibility forecasts that UK debt interest payments will rise to £117 billion in 2027-28, exceeding its £96.5 billion estimate for public sector net borrowing that year. Higher bond yields could push the bill above that forecast, adding pressure to Chancellor John Healey’s Budget and his fiscal rules.

The UK Government’s debt interest bill is forecast to reach £117 billion in 2027-28, more than the £96.5 billion it is expected to borrow that year to cover the gap between spending and revenue, according to the Office for Budget Responsibility. The figures add pressure on Chancellor John Healey ahead of his Budget, as higher bond yields could push debt costs beyond the official forecast.

The OBR’s figures show debt interest payments rising from £109 billion in 2025-26 to £117 billion in 2027-28. The comparison is between the cost of servicing existing government debt and the forecast for public sector net borrowing in that year; it does not mean the interest bill itself is new borrowing or that the two measures are interchangeable. The forecast nevertheless illustrates the scale of the charge on public finances.

Debt interest is reported to account for about £8 of every £100 of government spending. That money is not available for other priorities, including public services, defence or tax reductions. The OBR is updating its projections ahead of the Budget, and the figures cited are forecasts rather than final outturns.

Economists say the bill could be higher if inflation and market interest rates rise further. Capital Economics forecasts interest costs of £149 billion in 2030-31, compared with the OBR’s £137 billion projection, and estimates a cumulative £682 billion bill over the five-year period. Oxford Economics’ Andrew Goodwin said payments could be £9 billion to £10 billion higher in each year. Those are consultancy estimates, not OBR figures.

Debt Costs Narrow Healey’s Budget Choices

The pressure matters because the Government has committed to meeting fiscal rules that require borrowing to fall by the end of the forecast period. If debt interest costs rise while other assumptions remain unchanged, Healey may have less room to meet that commitment without raising taxes, reducing spending or changing other plans. The eventual effect depends on the updated forecasts and the policy choices announced in the Budget.

The reported fiscal headroom—the amount by which the Chancellor is forecast to meet his rules—has fallen to about £12 billion, roughly half its previous level, as bond yields have climbed. Headroom is sensitive to economic and market forecasts, so that figure may change when the OBR publishes its updated assessment. A smaller buffer also leaves less protection against unexpected costs or weaker revenues.

For households and public services, the issue is indirect but consequential: debt interest competes with other demands on the public purse. The figures do not establish which taxes or services might change. They show why the cost of government borrowing is a central constraint as the Budget approaches.

Why UK Debt Is Exposed to Inflation

Britain’s national debt is close to £3 trillion and, according to the report, is at its highest level relative to the economy since the early 1960s. The UK also pays more than any other G7 country to borrow, a position linked in part to the structure of its debt: about a quarter is index-linked, with payments affected by inflation.

That structure helped the Treasury during a period of low inflation and very low interest rates, but rising prices can increase the cost of index-linked debt. The pandemic and Russia’s invasion of Ukraine were followed by higher energy costs and inflation; efforts to curb inflation also contributed to higher borrowing costs. The report says the latest bond-market sell-off has driven government yields higher again.

Markets also remain sensitive to the 2022 mini-Budget under then-Prime Minister Liz Truss, which proposed unfunded tax cuts and was followed by disruption in the pensions market and higher mortgage costs. Some experts describe a lingering market penalty as a “moron premium.” That is an attributed characterisation, not an official measure of borrowing costs.

“It’s a landmark no government wants to reach.”

— Paul Dales, chief UK economist at Capital Economics

Forecasts Depend on Yields and Inflation

The £117 billion figure is an OBR forecast for 2027-28, not a confirmed final payment. The OBR’s revised projections have not yet been published, and the effects of future inflation, bond yields, economic growth and tax receipts remain uncertain. The report links the latest market pressure partly to conflict in the Middle East, but does not quantify how much that factor has added to expected borrowing costs.

It is also unclear whether the OBR will revise the estimated £96.5 billion borrowing figure or the reported £12 billion of fiscal headroom. Capital Economics and Oxford Economics offer higher estimates, but their projections are separate from the official forecast and rest on their own assumptions. The precise decisions Healey may take to meet the fiscal rules have not been announced.

OBR Update Precedes October Budget

The OBR is preparing updated economic and fiscal forecasts for the Budget scheduled for October 28. Those projections should clarify whether the official debt interest and borrowing estimates have changed, and how much headroom remains against the Government’s fiscal rules.

Healey and the Treasury will then set out the Budget measures and explain how they intend to meet the rules. The Treasury has said the Government will meet them and retain a buffer against uncertainty. The scale of any tax or spending changes, and the assumptions behind the final debt projections, remain to be seen.

Key Questions

What is forecast to happen to UK debt interest?

The OBR forecasts payments will rise from £109 billion in 2025-26 to £117 billion in 2027-28. These are forecasts, not final spending figures.

How does the interest bill compare with borrowing?

For 2027-28, the forecast £117 billion interest bill is higher than the OBR’s £96.5 billion public sector net borrowing estimate. Interest payments service government debt; net borrowing measures the amount borrowed to cover the wider gap between spending and revenue.

Why could the official estimate rise?

Higher bond yields can increase the cost of issuing or refinancing debt, while inflation affects payments on the UK’s index-linked bonds. The OBR’s updated forecast will reflect its assessment of economic and market conditions.

What does this mean for the Budget?

A higher interest bill could reduce the Chancellor’s room to meet fiscal rules and fund other priorities. The figures do not confirm that any particular tax increase or spending cut will be announced.

When is the next major update?

The Budget is scheduled for October 28, with the OBR updating its forecasts ahead of it. The revised figures should show how the official estimates and fiscal headroom have changed.

Source: rss