UK faces rising debt costs and growth

The UK faces ballooning debt costs and slower economic growth ahead of Chancellor John Healey's first Budget next month. The head of the International Monetary Fund, Kristalina Georgieva, and the OECD have issued warnings.

Kristalina Georgieva told reporters that Britain and the US needed to reduce debt due to spiralling borrowing costs. She said global economic shocks had been pushing debt levels up, but governments had taken no action to contain that service cost. "[It's] time to take that action," she said, adding that 'courage' was needed by politicians to take the necessary steps.

UK borrowing surges and growth outlook dims

Prime Minister Andy Burnham said on Wednesday that the UK's high level of borrowing had left it 'over-exposed' to global shocks. This pressure was compounded by an unexpected surge in government borrowing in August.

The Organisation for Economic Co-operation and Development published a report on Wednesday showing downgraded growth forecasts. It now expects UK growth of 1% next year, down from a previous forecast of 1.1%. The OECD did, however, upgrade its forecast for UK growth this year from 0.9% to 1.1%. Next year, global growth is expected to be 0.1% lower, with countries affected including Australia, Canada, and the Euro-area.

Energy costs and inflation drive fiscal strain

Higher fuel and energy costs, driven by the ongoing conflict in the Middle East and the Russia-Ukraine war, have pushed up inflation around the world. This inflation has increased the cost of interest on government debt.

According to the OECD, stockpiles of oil and supplies from outside the Gulf states have helped cushion the effects on economies so far. The impact of higher fuel prices next year depends on how long supply disruptions last. Ruth Gregory, deputy chief UK economist at Capital Economics, said the UK had so far remained resilient to higher energy prices. She noted most of that reflected businesses having built up stock and households not putting so much disposable income into savings. Gregory said this effect would be temporary, with growth more muted next year. She added that the drag on the economy from energy prices would pick up, while debt interest payments as a percentage of economic output are forecast to hit levels seen in the mid-1980s.

Political responses and fiscal balancing act

Chief Secretary to the Treasury Emma Reynolds pointed to underlying strength. "Despite unprecedented pressures and conflict in both the Middle East and in Europe, the UK economy is showing strong resilience," she said. Reynolds added that the government is already giving families space to breathe and starting the long-term changes needed for growth.

Conservative shadow chancellor Andrew Griffith said the OECD urges countries to control spending and improve public sector efficiency. He criticised the government's approach, saying it is trying to find new ways to tax people whilst paying the highest borrowing interest rates in the G7.

Andy Burnham and Chancellor John Healey face a difficult balancing act. They must weigh offering more support to households against sticking to Labour's manifesto commitments on tax and the government's self-imposed fiscal rules. Burnham said he stood by his point made a year ago that Britain should be less in hock to investors in the bond markets, remarks which at the time spooked investors. He has made easing the cost-of-living for households a key aim. The government is also under separate pressure to spend more on defence.

Ryanair signals broader cost pressures

The strain from higher energy costs is filtering through to consumers. Budget airline Ryanair will put up ticket prices next summer as a result of persistently higher oil prices. Chief executive Michael O'Leary said prices will be materially higher, adding that carriers are in an almost unprecedented situation. Ryanair's fuel bill could jump by $1.5bn (£1.1bn) next year to $7.5bn.

Other risks to the global economy flagged by the OECD include weaker-than-expected returns on AI investment and climate-change related supply shocks. Weather-related shocks, including from a strong El Nino, could hit farmers and help push up food prices. Tariffs and export restrictions on trade continue to add to uncertainty, with new US tariffs from July raising its effective tariff rate by 1%.

Chancellor John Healey must handle these rising debt costs and a slower growth outlook in his first Budget next month.