The UK needs to run its first primary budget surplus in 25 years if it is to put government debt on a sustainable downward path, according to the National Institute of Economic and Social Research (NIESR).
The economic research institute warns that simply attempting to stabilise debt at around its current level leaves the public finances vulnerable to future economic shocks and could result in debt repeatedly ratcheting higher.
NIESR argues that delaying fiscal consolidation will ultimately increase the adjustment required and leave households and the wider economy facing a greater cost.
The warning comes with government borrowing costs already elevated and debt interest absorbing a significant share of public spending.
£110BN INTEREST BILL
NIESR puts annual debt interest costs at around £110bn, equivalent to roughly one pound in every ten of government revenue.
That figure is supported by the Office for Budget Responsibility’s latest economic and fiscal outlook, which forecasts debt interest spending of £109.7bn in 2025-26, rising to £137.1bn by 2030-31.
The OBR expects public sector net debt to rise from 94.3% of GDP in 2025-26 to 96.3% in 2028-29 before easing to 95.1% by 2030-31.
It has also warned that debt has nearly tripled as a share of GDP over the past two decades, while UK borrowing costs are among the highest across advanced economies.
NIESR argues that the UK remains partly protected by cheaper government debt issued in previous years, but that this debt increasingly has to be refinanced at today’s higher rates as it matures.
GILT YIELDS
The institute estimates that every percentage point of credible improvement in the path of the deficit could reduce 10-year gilt yields by between 10 and 15 basis points.
Once reflected across the stock of government debt, it estimates this could eventually reduce annual borrowing costs by between £3bn and £4.5bn.
The latest public finances have already illustrated the sensitivity of borrowing to higher financing costs. The OBR reported in July that borrowing during the first three months of 2026-27 was £2.7bn above the profile assumed in its March forecast, with higher debt interest among the factors pushing government spending above expectations.
‘WAITING IS NOT FREE’
David Aikman (main picture, inset), director of NIESR, said: “A plan to hold the debt ratio steady, which is really what adhering to the fiscal rules implies, is actually a plan to let it ratchet upwards. It makes no allowance for the next recession or crisis.
“High debt has other costs too: it leaves the public finances highly exposed to global interest-rate shocks, and it hands the bill for our past consumption to the next generation, who inherits the mortgage without the house.
“These decisions cannot be deferred indefinitely. Waiting is not free: at today’s borrowing costs the required adjustment grows the longer it is put off, and the eventual cost falls on households and the wider economy.”
