OBR Warns Higher Inflation Is Pushing Up UK Government Debt Interest Costs Above Forecast

The Office for Budget Responsibility’s latest monthly commentary on the public finances confirms that above-forecast inflation is driving up the cost of servicing government debt, with UK debt interest spending projected to reach £137 billion by 2030–31.

—

The Bill Nobody Wanted

Picture a mortgage where the interest rate climbs every time the cost of a pint of milk goes up. That, in rough terms, is the problem facing the UK government right now — and the Office for Budget Responsibility has just put fresh numbers on exactly how bad it’s getting.

The OBR, the UK’s independent fiscal watchdog, posted on social media this week to flag its latest monthly commentary on the public finances. Short and direct, the post said it plainly.

The commentary confirms what economists have been watching with growing unease: inflation doesn’t just squeeze household budgets. It inflates the government’s own debt repayments too.

Why Index-Linked Gilts Make Inflation So Costly

The reason comes down to the structure of UK government borrowing. Around 24 per cent of UK government gilts were index-linked in 2020–21, according to OBR analysis. These are bonds where both the interest paid and the amount owed rise in line with the Retail Prices Index. When inflation runs hotter than expected, the government’s bill goes up automatically — there’s no cap, no ceiling, no escape clause.

For their part, the numbers are striking. Higher RPI inflation since the March 2021 forecast added around £13.8 billion to debt interest spending in 2021–22 alone. The following year, 2022–23, saw a further £10.3 billion added on top of what had previously been projected. That’s not a rounding error. That’s the equivalent of entire departmental budgets evaporating before ministers have spent a penny.

The Long-Term Forecast Makes Uncomfortable Reading

The OBR’s March 2026 Economic and Fiscal Outlook sets out where things are heading. Nominal debt interest spending is forecast to climb from around £110 billion in 2025–26 to close to £137 billion by 2030–31. As a share of GDP, that’s a rise from 3.6 per cent to 3.8 per cent — roughly twice the pre-pandemic decade average of around 2 per cent of GDP.

Put simply, the UK is spending far more just to stand still on its debts than it did before the pandemic.

The Institute for Fiscal Studies, drawing on OBR data, has noted that rises in Bank Rate, gilt yields and high inflation have “pushed up debt interest spending,” and that soaring inflation has both increased debt interest spending and worsened medium-term growth prospects.

External analysis using OBR figures also suggests that higher borrowing and interest rates together increase the cost of servicing the government’s roughly £3 trillion stock of debt by around £4 billion — an illustrative figure, but one that gives a sense of how sensitive public finances are to even modest shifts in inflation or rates.

What Government and Critics Are Saying

HM Treasury’s position has been consistent: meeting fiscal rules and maintaining market confidence is the best way to keep future interest payments under control. Ministers have also pointed out that higher debt interest is a global phenomenon, tied to worldwide inflation and interest rate rises rather than domestic policy choices alone.

But critics aren’t entirely convinced. Opposition voices and some economists argue that past fiscal decisions left the UK more exposed than it needed to be when inflation surged. Some have also questioned the scale of the index-linked gilt programme itself, suggesting that heavy reliance on RPI-linked debt made public finances unusually sensitive to inflation shocks. Others warn that responding to higher debt interest with sharp spending restraint risks repeating the economic damage of austerity-era cuts.

The OBR itself takes no political position — its job is to monitor, measure and explain. And right now, the explanation isn’t a comfortable one.

A Watchdog With a Statutory Duty

The OBR was created in 2010 specifically to provide independent scrutiny of the public finances. Its monthly commentary interprets Office for National Statistics data on public sector borrowing, debt and spending, flagging where outturns are running ahead of or behind forecast. When debt interest costs deviate from projections — as they have done sharply since 2021 — the OBR’s commentary becomes the primary public record of that deviation.

Meanwhile, the long-term picture is harder still. Without policy changes, OBR fiscal risks and sustainability work has previously suggested that UK public sector debt could rise substantially over coming decades, with some scenarios projecting debt exceeding 200 per cent of GDP in the very long run, driven partly by compounding debt interest if borrowing remains elevated.

—

Key Takeaways

• Higher-than-forecast inflation has increased UK government debt interest costs by billions of pounds, largely because around 24 per cent of gilts are index-linked to RPI
• Debt interest spending is forecast to rise from £110 billion in 2025–26 to £137 billion in 2030–31, about twice the pre-pandemic average as a share of GDP
• The OBR’s monthly commentary forms part of its statutory role to monitor how actual borrowing and spending compare with official forecasts

—

What This Means for Kent Residents

Higher national debt interest costs reduce the fiscal headroom available for public spending across the board — and Kent feels that squeeze directly. Funding allocations to Kent County Council, Medway Council and district councils are shaped by central government spending envelopes; if those envelopes tighten in response to rising interest bills, local services from highways maintenance and social care to libraries and youth provision face harder choices. NHS Kent and Medway, along with local GP services and local authority social care, are also exposed to national spending decisions influenced by the overall cost of servicing government debt. For households and businesses across the county, the broader inflation and interest rate environment that drives up government borrowing costs is the same environment pushing up mortgage rates, rents and business borrowing — so while the OBR’s analysis operates at UK level, its consequences land on kitchen tables and high streets from Folkestone to Faversham. Kent residents can keep track of how national fiscal decisions affect local budgets by following updates from Kent County Council and Medway Council, both of which publish annual budget reports and medium-term financial plans setting out the impact of central government funding changes on local services.