Britain’s finances are in serious difficulty. More than £100 billion (£100,000,000,000) of taxpayers’ money is now spent each year just paying the interest on government debt. The Office for Budget Responsibility (OBR) projects £111.2 billion of interest in 2025 to 2026, equal to about 8.3% of total public spending and just over 3.7% of national income. Total debt is currently about 96% of the size of the whole economy.
Borrowing remains high. In June the Treasury borrowed £20.7 billion (£20,700,000,000), which was £6.6 billion more than the same month last year and above the OBR forecast. In July borrowing fell to £1.1 billion, but that month is always lifted by self-assessed Income Tax receipts, so the underlying position is unchanged. For the financial year to July, borrowing had already reached £60 billion, with a current budget deficit of £42.8 billion, which was £5.7 billion higher than expected.
When the government borrows it sells bonds. A bond is an IOU that pays interest and returns the principal at a set date. About 31% of these are held by overseas investors, so maintaining credibility with international buyers matters for the price we pay to borrow. The average maturity of the gilt stock at the end of 2024 was about 14.4 years, which limits rapid refinancing risk, but the share of index linked gilts makes interest costs sensitive to inflation.
Gross Domestic Product, or GDP, is the value of everything produced in the economy in a year. Saying debt is 96% of GDP means the state owes almost as much as the whole country produces in twelve months. A primary surplus is when the government’s income from taxes exceeds all spending except interest. The OBR has said Britain would need a primary surplus of about 1.3% of GDP to stabilise the debt ratio in the medium term. We are not there.
Interest costs are high because new borrowing carries higher market rates, because about a quarter of debt is index linked to inflation, and because a higher Bank Rate raises the interest paid on central bank reserves created during quantitative easing. The OBR attributes the rise in debt interest to higher Bank Rate, gilt yields, and Retail Prices Index inflation.
This affects households directly. Higher borrowing and higher debt interest keep mortgage and loan costs elevated and squeeze public services because cash that could fund schools and hospitals goes first to creditors. In July alone, interest payable was £7.1 billion (£7,100,000,000) even after the prior month’s spike faded, which shows how persistent the pressure has become.
Trade makes the position worse. The total goods and services trade deficit widened to £13.2 billion in the three months to May 2025 as imports rose and exports fell. In the second quarter the trade gap was £9.2 billion with imports up by about £2.2 billion and exports up by only about £0.5 billion. A country that buys more from abroad than it sells must rely on foreign savings to bridge the gap, which adds to financing risk.
Warnings are coming from respected voices. Jagjit Chadha of the National Institute of Economic and Social Research has said that Britain is edging towards conditions similar to the 1976 International Monetary Fund bailout, pointing to the twin pressures of a £60 billion budget deficit and a persistent trade gap that leaves the UK dependent on foreign confidence. Bond markets are already flashing red. Thirty-year gilt yields are now above 5.6%, the highest in 27 years, and the pound is once again described by investors as vulnerable to another crisis of confidence like the 2022 “Truss tantrum.” Inflation has also edged back up to 3.8% in July, with sharp increases in food and airfares, while top investor Ray Dalio has warned that Britain risks being caught in a “debt doom loop” of rising borrowing, higher taxes, and weak growth that drives capital out of the country.
The historical parallels are striking. In 1976 Britain’s debt was far lower in percentage terms than it is today, at around 50% of GDP, but the collapse of confidence forced the government of James Callaghan to seek a £3.9 billion loan from the International Monetary Fund. Conditions were imposed and public spending was slashed. In 1992 Black Wednesday saw Britain ejected from the European Exchange Rate Mechanism when the government failed to defend the pound. Interest rates were hiked to 15% in a desperate bid to hold the line, but markets overwhelmed the policy and the currency fell. Both events were humiliating and left lasting scars. Today debt is almost double the 1976 level relative to GDP and bond yields are at levels not seen since the mid 1990s. The comparison underlines how fragile Britain’s position has become.
On immigration-related costs the reality is staggering. As of June/July 2025, around 32,000 asylum seekers are still being housed in 210 hotels at a daily cost of about £5.5 million. Down from earlier months, but still higher than at the end of June 2024. That is almost £2 billion a year being poured into hotels, a system that even the National Audit Office has said delivers poor value for money. Three-quarters of the asylum accommodation budget is swallowed by hotels that cover just over a third of claimants. This is the economics of failure: billions burned to prop up a system that nobody believes is working.
Overseas aid is no better. In 2023 Britain spent £15.4 billion on aid, yet £4.3 billion, 28% of the entire budget, was spent not abroad but on in-country refugee costs. Even after a fall in 2024 this still consumed £2.8 billion or 20% of the total aid budget. That means billions that the public are told is helping the world’s poorest never leaves the UK. At a time when debt is climbing and households are under pressure, this distortion is indefensible.
Foreign conflicts come with a price tag Westminster avoids mentioning. The government has pledged at least £3 billion every year in military support to Ukraine until 2030–31, with total commitments already £21.8 billion once non-military aid and export finance guarantees are counted. These vast sums are locked in while Britain pays over £100 billion in debt interest. Ministers claim the country cannot afford to fix broken services at home, yet they sign off tens of billions abroad.
The current government has not shown that it understands what is required to change course. Borrowing in key months is rising rather than falling, tax rises are being floated as the go to answer, and large areas of spending that deliver little value remain in place. This mix means higher interest bills, weaker growth, and continued pressure on households.
A credible path is available. Everyday spending must be reviewed from the ground up and closed where it does not deliver results. Investment should continue only where there is a clear business case with costs, benefits, and timelines published before money is committed. The tax system should be made stable so workers keep more of what they earn and businesses can plan. One clear and permanent rule should be introduced and kept in place across parliaments that everyday spending must balance over time.
If Britain does this, debt can be stabilised and confidence rebuilt. If not, debt will continue to rise, markets will lose patience, and outside lenders may again dictate terms as they did in 1976.