Interest rate predictions from the UK government

10 August 2017

The House of Commons Library published an impartial Briefing Paper for MPs on 21 July 2017 (Number 05745) that caught my eye. The Briefing Paper was titled ‘Government borrowing, debt and debt interest: historical statistics and forecasts’, and I wondered whether the forecasts section would give an indication of where the UK government expects interest rates to move over the next few years.

The raw data in the Briefing Paper (with my own calculations of the approximate interest rates) can be summarised as follows:

Financial year Public sector debt £bn Debt interest £bn Approx interest rate percentage B of E base rate average percentage
2002/03 356 20.9 5.87% 3.75%
2003/04 391 22.2 5.94% 3.75%
2004/05 447 24.7 5.89% 4.38%
2005/06 487 26.5 5.67% 4.63%
2006/07 524 28.8 5.70% 4.85%
2007/08 557 31.4 5.81% 5.45%
2008/09 767 31.7 4.79% See table*
2009/10 1,011 31.7 3.57% 0.50%
2010/11 1,156 46.8 4.32% 0.50%
2011/12 1,251 49.8 4.14% 0.50%
2012/13 1,363 49.0 3.75% 0.50%
2013/14 1,457 48.8 3.46% 0.50%
2014/15 1,554 45.4 3.02% 0.50%
2015/16 1,603 45.1 2.86% 0.50%
2016/17 1,727 48.4 2.91% 0.25%
2017/18 E 1,830 55.8 3.14%
2018/19 E 1,885 52.3 2.82%
2019/20 E 1,918 52.2 2.75%
2020/21 E 1,904 51.9 2.72%
2021/22 E 1,904 53.7 2.82%

*Financial year 2008/09

Base rate percentage
From 7 February 2008 5.25%
On 10 April 2008 5.00%
On 8 October 2008 4.50%
On 6 November 2008 3.00%
On 4 December 2008 2.00%
On 8 January 2009 1.50%
On 5 February 2009 1.00%
On 5 March 2009 0.50%
On 4 August 2016 0.25%

Before moving on to interest rates – it’s worth reflecting on the sheer eye watering quantum of the interest paid each year. The UK government anticipates spending over £50 billion per annum on interest over the next few years. That compares with the approximate £15 billion it cost to build Crossrail or the annual total running costs of the NHS at around £122 billion.

The debt interest rate is impacted by a number of national and international market forces (including an assessment of UK creditworthiness), so there is no direct correlation between that rate and the Bank of England base rate. However in recent history the debt interest rate has floated at around 1% to 2% higher than the Bank of England base rate before the financial crisis in 2008.

Following the collapse of the base rate during 2008/09 (see above table), the differential between the debt interest rate and the base rate thereafter floated at around 2% to 3% higher.

So what of the future for interest rates?

The data in the Briefing Paper indicates that the UK government expects there will be no significant movement in the debt interest rate during the five years to 31 March 2022. Accordingly it is reasonable to assume that the Bank of England base rate will follow the historical trends and similarly show no significant movement during that period.

Only time will tell whether the UK government forecasts are reasonable or not, as there are many potential bumps on the road over the next five years.

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