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Public Sector Debt

Question for Treasury

UIN 169881, tabled on 16 March 2021

To ask the Chancellor of the Exchequer, what assessment he has made of the effect of (a) increased inflation and (b) normalisation of the Government bond yield on public borrowing costs.

Answered on

23 March 2021

The Chancellor has regular discussions on macroeconomic policy with European and G7 counterparts. They all recognise the significant challenges ahead of us in the months to come. The G7 has an important role to play in steering the global economy, and as Chair of the G7 Finance Track, the Chancellor has discussed with colleagues how best to shape and respond to the phases of the global recovery from Covid-19. This includes the short- and medium-term economic challenges relating to both fiscal and monetary policy. The Chancellor will continue to work with colleagues over the coming months to learn from each other’s policy interventions, to recognise and manage spillover effects, and to support continued coordination on policy responses.

As highlighted in the Budget, while borrowing costs are affordable now, interest rates and inflation may not stay low forever. A sustained 1 percentage point increase in both interest rates and inflation would increase debt interest spending by £27.8bn in 2025-26.

It is important to take action as the economy durably recovers to limit the UK’s exposure to this risk and to build fiscal resilience. The Office for Budget Responsibility’s March 2021 forecast shows that the medium-term outlook for the public finances has returned to a more sustainable path, supported by the fiscal repair measures set out in the recent Budget.

Treasury Ministers have regular discussions with counterparts in the devolved administrations on matters of mutual interest.

Answered by

Treasury