From the financial crisis to Russia’s invasion of Ukraine, the UK has borrowed and spent to get out of every trouble. The fee itself becomes a concern.

Britain’s public debt burden has soared more than 40% since the outbreak to nearly 2.6 trillion pounds ($3.3 trillion), surpassing its total annual economic output for the first time since 1961. Linked bonds during periods of high inflation also meant that the UK would pay more on service liabilities than any other advanced economy.

While the huge spending has helped the Conservative-led government cushion the political blow from the recent setback, it risks dampening investment and sending Britain into a vicious cycle that could last for years. Last month, the Office for Budget Responsibility warned that debt could balloon to more than three times gross domestic product over the next half-century if no action was taken.

The outlook has reignited questions about Britain’s credit rating, especially after Fitch Stripping the US government of its triple-A status surprised Wall Street and the White House. Prime Minister Rishi Sunak’s efforts to rebuild Britain’s fiscal credibility are set to be downgraded after his predecessor, Liz Truss, promised massive unfunded tax cuts a year ago, sparking bond market sentiment. crash.

The pressure was exacerbated by a bond sell-off as the Bank of England raised interest rates sharply to calm inflation. The 10-year benchmark yield rose above 4.70% this week, its highest level since 2008. The UK bond market has been one of the worst-performing developed-world bond markets this year.

Sunak and his main rival for the prime ministership after next year’s general election – Labor leader Keir Starmer – have little choice.Economic growth expected to remain flat next year National Health Service The tax burden has reached a 70-year high.

“It will not be easy to get out of the current situation,” warned Maxim Rybnikov, chief UK sovereign analyst at S&P Global Ratings. “The current fiscal situation is weighing on ratings.”

The three major credit rating firms will update their assessments of the UK over the next four months. Moody’s and S&P Global Ratings are scheduled to make announcements on Oct. 20, and Fitch on Dec. 1.

Mike KuzierPortfolio managers at PIMCO said the U.S. downgrade was a reminder that “risks related to deficit spending and debt sustainability are often dormant and could emerge and raise concerns.”

Unlike the US, the UK has no irredeemable status.A decade ago, Moody’s and Fitch removed the country’s top rating, with Standard & Poor’s following suit in June 2016, days after Britain voted to leave the European Union. European Union. The UK still enjoys investment-grade ratings from all three agencies.

Despite near-daily calls for tax cuts and more spending to boost a stalled economy, Sunak has made reducing the country’s debt burden one of five key pledges. Next, Chancellor of the Exchequer Jeremy Hunt will have the chance to discuss the issue in his Autumn Budget statement, which is expected to be released in November.

The UK’s most recent rating action has been positive: S&P revised its outlook to stable from negative in April. But Moody’s and Fitch, which highlighted Britain’s inflation-related debt woes in a report last month, have remained negative on the country’s outlook since Truss released a “mini-budget”.

While the risk of another downgrade was unclear, investors said the impact on British assets could be more severe than the perennial safe-haven U.S. dollar and U.S. Treasuries.

“The U.K. is more vulnerable to sudden debt sustainability concerns because, unlike the U.S. dollar, sterling is not a major world reserve currency,” said Sam Zief, head of foreign exchange strategy at JPMorgan Private Bank. Sex doesn’t affect the market until it actually affects the market.”

Index-linked gilts were first issued in the 1980s under then-prime minister Margaret Thatcher as the country struggled to clear the sign of accepting an IMF loan in 1976 . Inflation-linked debt, which was built up during decades of low inflation.

Gilt-linked bonds currently make up a quarter of all outstanding UK bonds. This is double the share of Italy, the second-largest issuer among advanced economies.

Fitch said the UK faced debt interest payments of 10.4% of income this year, the highest share among developed countries. Meanwhile, debt is expected to jump to 105% of GDP by 2025.

“If inflation becomes entrenched, it will become a bigger problem,” said Eiko Sievert, head of sovereign and public sector. range rating. “The whole debate over the heavy burden on public finances that index-linked gilts place on public finances will become much quieter if inflation pressures are expected to fall sharply next year.”

But a series of shocks over the past 15 years have pushed the UK so deep into the deficit. Before the 2008 financial crisis, the UK’s debt-to-GDP ratio was relatively low at around 35%. Then came bank bailouts, pandemics and most recently the Russian invasion of Ukraine.

According to the National Audit Office, the Conservative government has spent 376 billion pounds to support businesses and households during the epidemic, including 70 billion pounds for the furlough employment protection scheme. A further £70bn was used to support energy bills and other payments as gas prices soared after the Russian war.

Despite the moderation in inflation, UK public finances will remain under pressure. Next year’s state pensions bill is expected to rise by 8.2 per cent under the government’s “triple lock”, which guarantees benefits will rise in tandem with wages or inflation, whichever is higher.

It will cost taxpayers around £10bn, according to online investment service Interactive Investor. The government’s independent forecaster said last month that a surge in claimants for sick working-age benefits would cost the state another £15bn in lost tax and higher benefits.

For now, the Bank of England’s efforts to control prices are making things worse. Rising interest rates are exacerbating losses as the central bank unwinds the vast pile of bonds it has amassed during more than a decade of quantitative easing to support the economy. The taxpayer’s loss is expected to exceed £150bn over the next 10 years.

One concern is that the Conservatives, trailing Labor by double digits in opinion polls, may want to ease fiscal policy. Some members of parliament have urged Sunak to cut taxes before the election.

Morgan Stanley UK economist Bruna Scalica said much would depend on the progress of the two budgets in the autumn and spring. “If the Treasury tries to ease monetary policy significantly in the short term, but cuts commitments in the medium term, some credit rating agencies may find this less plausible.”

Both of Hunt’s previous budgets delayed £30bn of spending cuts, but these cuts will not come into effect after the next election. This sets up a potential pitfall for Starmer and his future chancellor, Rachel Reeves, who may face two choices: accept responsibility for painful spending cuts, or risk another shortly after taking office. Risk of investor revolt.

Starmer and Reeves say the UK needs to grow out of the woods. Even so, Labor has conceded it will have to delay the start of an ambitious plan to reshape the economy – which promises to invest £140bn in green industries over five years.

Taking a closer look, the numbers look bleak, as the OBR warns that debt could reach 300% of GDP by the 2070s.

“In some ways, it’s a pretty depressing prospect,” David Miles, a senior OBR official, said in an interview. “Unless you get back to the productivity growth levels of the 80s, 90s and early 2000s, some adjustments will have to be made.”

    — With assistance from Andrew Atkinson and Joel Linneby

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