Treasury on course to spend 10% of government revenue on bond costs this year, according to Fitch

The UK is on track to incur the highest debt interest costs in the developed world this year as persistently high inflation and an unusually large proportion of government bonds linked to price rises damage the public finances.

The Treasury will spend £110bn on debt interest in 2023, according to a forecast by Fitch. At 10.4 per cent of total government revenue, that would be the highest level of any high-income country — the first time the UK has topped the data set that goes back to 1995.

Roughly a quarter of UK government debt is in the form of so-called index-linked bonds, whose payouts fluctuate in line with inflation, making the country a huge outlier internationally. Italy has the next highest share with 12 per cent of its bonds tied to inflation, while most countries have less than 10 per cent.

“We’ve had a very large inflation shock which is adversely affecting the public finances and that is obviously a key driver of the sovereign credit rating,” said Ed Parker, global head of research for sovereigns and supranationals at Fitch.

The agency reiterated in June its negative outlook on the UK’s double A minus credit rating, citing “the UK’s rising government debt and uncertain prospects for fiscal consolidation”.

Parker said a negative outlook signals that a downgrade is “more likely than not if current trends continue” and that the agency would normally hope to clarify a negative outlook within two years.

Debt interest costs as a proportion of revenue are a key measure of debt affordability and have jumped in the UK in the past couple of years while coming down elsewhere.

The UK will sit at the top of the Fitch debt interest costs table after its ratio increased dramatically in the past two years from an average of 6.2 per cent between 2017 and 2021.

In contrast, the average among western Europe and North American countries is set to fall from 4 per cent in the five years to 2021, to 3.7 per cent this year, as inflation has boosted government revenues and in some countries the debt expiring had higher interest rates than new debt issued.

Rising debt costs in the UK come as inflation proves harder to tame than in other developed economies, despite recent signs of improving data. The UK’s retail price index, which guides index-linked gilt interest payments, rose 10.7 per cent in the year to June, while wage inflation has yet to show signs of easing.

Fitch forecasts the UK’s debt interest-to-revenue ratio should start to fall next year as inflation continues to ease, with the interest burden of both the US and Italy set to overtake the UK in 2024.

However, rating agencies expect the UK’s interest costs to stabilise at historically high levels. “We expect the debt affordability of the UK to remain relatively weak” said Evan Wohlmann, a senior credit officer at rival rating agency Moody’s.

“Debt affordability is at risk from more persistent inflation as well as from a potential sustained erosion of the UK’s policy credibility,” he added.

Moody’s, which has an Aa1 rating on the UK — it’s second highest level — also has a negative outlook, a position it has held since October and expects to clarify within 12 months.

Concern among rating agencies on the UK’s credit outlook comes after the Office for Budget Responsibility, the UK’s fiscal watchdog, warned that public finances were in a “very risky” position, with government debt on course to hit 310 per cent of gross domestic product in 50 years.

The OBR said that the UK was “more vulnerable” than other advanced economies when it came to public debt, which in May surpassed 100 per cent of gross domestic product for the first time since 1961.

The government plans to sell £241bn of gilts in the current financial year, a sharp increase from £139.2bn issued in the previous 12 months, with issuance net of Bank of England bond purchases and sales expected to be about three times more than the average over the past decade.

Swedish group Vattenfall suspends Norfolk Boreas offshore project, which was set to power 1.5mn homes, due to surging costs

UK efforts to boost renewable energy have suffered a major setback after one of the country’s biggest offshore wind farm projects was halted due to surging costs.

Swedish energy group Vattenfall on Thursday said it had suspended development of its 1.4GW Norfolk Boreas wind farm after costs on the project rose 40 per cent.

Increased cost was putting “significant pressure on all new offshore wind projects”, the company said, adding that it would “not take an investment decision now” on the project and would book an impairment charge of SKr5.5bn ($537mn).

“What we see today, it simply doesn’t make sense to continue this project,” said Vattenfall’s chief executive Anna Borg.

The UK government is seeking to more than triple offshore wind capacity by 2030 — from about 14GW to 50GW — to help decarbonise the country’s electricity system.

Norfolk Boreas had been one of the biggest new projects in the offshore wind pipeline, set to help power 1.5mn homes. The wind farm was due to be the first of three to be built by Vattenfall in the UK on the east coast, to power more than 4mn homes in total.

The wind industry has warned over the past few months that rising interest rates along with turbine and labour costs have been putting UK projects at risk.

The British government last year awarded the Norfolk Boreas project a contract guaranteeing a fixed price of £37.35 per megawatt-hour for its electricity for the first 15 years, in 2012 prices and linked to inflation. Ministers celebrated a sum that was well below the ones agreed in previous years.

However, developers have argued that surging costs linked to supply chain problems in the wake of Russia’s full-scale invasion of Ukraine mean the projects may no longer be economically viable under these terms.

Vattenfall’s announcement is likely to heap pressure on the government, which is in the process of awarding the next round of fixed-price contracts. Developers have already warned that the maximum price of £44/MWh in 2012 prices is also too low.

Mads Nipper, chief executive of Ørsted, the world’s largest offshore wind developer, told the Financial Times last month that it was “inconceivable” that UK projects were not struggling.

The other two Vattenfall projects may be able to get higher government contracts, meaning they could still go ahead, Borg said. “We will now look into the situation and find the best way forward for all these projects — the energy is desperately needed,” she said.

Ofgem proposes reform after finding some power station owners held back supplies to secure higher prices

The British energy regulator has accused power station owners of trying to game the system for excess profits, as it set out steps to try and clamp down on the practice.

Ofgem said on Thursday that an investigation had found some generators had withheld supplies in order to fetch a higher price for them in the back-up market, pushing up costs for consumers at the height of the energy crisis.

It launched the probe after the costs of keeping supply and demand matched through the so-called balancing market hit record levels in November 2021 at the start of the energy crisis, with £60mn spent by network operator National Grid on one day alone.

Ofgem said those costs during the winter of 2021-22 — when demand is highest — hit £1.5bn, more than triple the level of the average over the preceding three winters.

The watchdog said it would crack down on “various behaviours it had identified among some generators, who have been attempting to gain excessive financial benefit at a cost to consumers”.

It is proposing a new licence condition to “ensure electricity generators don’t take advantage of existing rules to make excessive profits”, said Eleanor Warburton, Ofgem’s acting director for energy systems management and security.

The new licence condition, which will restrict generators’ ability to profit and include financial penalties for breaches, could be in place in time for winter, Ofgem said.

The intervention comes after UK chancellor Jeremy Hunt earlier this week stepped up the pressure on regulators, including Ofgem, to do more to keep consumer costs down.

Ofgem said: “We believe it is necessary to intervene to prohibit behaviours that result in generators realising excessive benefits, which are costs ultimately payable by consumers.”

The watchdog did not name the companies involved. However, an investigation by Bloomberg earlier this year said some traders at firms including Vitol, Uniper and SSE would tell National Grid they were shutting down power plants ahead of periods of tight supply only to start them up again once they had secured higher prices for the power.

Electricity supply and demand has to be constantly matched to avoid blackouts. National Grid smooths out any mismatches, using the “balancing market” to pay generators to switch on or turn off at short notice.

Ofgem said it identified “repeated instances” of generators telling National Grid they were going to switch off, and then offering to turn back on at higher prices in the “balancing market”, which the network operator has little choice but to accept. SSE said it “fully complies” with the rules. Vitol declined to comment but had previously said its VPI power business abided by “all relevant regulations and fulfils any commitments to deliver power to the grid”. Uniper did not immediately respond to a request for comment.

Adam Bell, head of policy at energy consultancy Stonehaven, said Ofgem could in theory ask generators to return some of the excess profits earned through the balancing mechanism, but it had little enforcement power beyond that.

“What they’re alleged to have done was within the letter of the rules, even if not in the spirit of the rules,” he said.

Darren Jones, Labour chair of the business and trade select committee, said: “This is another example of company executives getting away with immoral profiteering. But as immoral as it is, it isn’t illegal. Ministers will decide if that’s acceptable or not.”

The proposed change to the licence conditions would limit the prices generators charge in the balancing mechanism to their costs “plus a reasonable profit”.

Bell warned that while reforms to the market may be necessary there was the risk that Ofgem’s proposals could lead to companies being less able to offer energy supplies when needed.

“The people primarily at fault here are clearly the ones that were gaming the system but it’s not a straightforward issue to solve,” Bell said. “There will almost certainly be some legitimate behaviour that will also be removed by these proposals.”

Energy UK, the trade group, has previously said there was disagreement among generators over whether to support the licence condition, with some concerns that it could distort the market and damage investment.

The energy department said it welcomed all actions taken to protect consumers and backed Ofgem in using all the powers at its disposal to go further if needed.

Party officials are conferring with sister parties around the world for strategies on winning elections

President Joe Biden rolled out the red carpet for Rishi Sunak in Washington this month, but behind the scenes senior figures from Britain’s Labour party were also in town, covertly reinforcing links with leading Democrats.

The talks, which Labour tried to keep quiet to avoid embarrassing Biden during the UK prime minister’s visit, are part of an effort by party leader Sir Keir Starmer to learn from the Democrats and other centre-left parties on how to win an election.

One meeting saw Morgan McSweeney, Labour’s campaign director, discussing policy with Neera Tanden, director of Biden’s Domestic Policy Council, according to two people briefed on the discussions.

Starmer’s media chief Matthew Doyle was among those attending talks in Washington in early June, which also involved officials from centre-left parties from Australia, New Zealand and other countries.

Some Starmer allies believe their party has a lot to learn from US Democrats as Labour tries to win back working class voters in the north of England and Midlands.

“With the amount of money they have in their system, they are way ahead of us in terms of targeting the rustbelt, the level of data they have — some of their polling and messaging techniques are way ahead,” said one member of Starmer’s shadow cabinet.

“They have done a lot on how you can talk about the green transition and link to jobs in a way that works in the rustbelt.”

The meetings in Washington centred on two days of events organised by the Center for American Progress, a liberal think-tank, and its sister organisation CAP Action.

One Labour official briefed on the meetings said they were “all organised well before it was known that Sunak would be coming to Washington. It’s a coincidence.” The party declined to comment.

The high level talks are sign of a developing alignment between Biden’s Democrats and Starmer’s Labour party, with both party leaders facing elections next year.

US elections take place on November 5, 2024, while Sunak is expected to call a vote in either the early summer of next year or — more likely — the autumn. In the latter scenario, US and UK elections could run concurrently.

Last month Rachel Reeves, Labour’s economics spokesperson, held talks in Washington with Biden administration figures, including Treasury secretary Janet Yellen, and gave a speech warmly endorsing “Bidenomics”.

The Democrats and Labour have long considered themselves sister parties; in the 1990s Tony Blair and Bill Clinton developed “the third way”, a pragmatic centre-left doctrine.

Starmer has borrowed heavily from Biden’s emphasis on “family, community and security”, with obvious parallels between Democrat policies aimed at America’s post-industrial “blue wall” and Labour’s attempt to reconnect with its lost “red wall” heartlands in England.

The Labour leader has been briefed by John Anzalone, a pollster for Biden on how the Democrats won back white, male, working class voters. He has also used the phrase “buy, make and sell more in Britain”, echoing Biden’s “buy America” slogan.

David Lammy, shadow foreign secretary, prides himself on his contacts in Washington, while Ed Miliband, shadow climate change secretary, put together his “green prosperity plan” while Biden was drawing up his own package of state intervention, the Inflation Reduction Act.

“Ed has had time with senior pollsters who informed the Biden campaign and have done a lot of work on polling and message testing,” said one Miliband aide. “Our mantra of ‘bills, jobs, security, climate’ is very much inspired by conversations we’ve had with Biden’s people.”

Starmer’s team say they are also drawing heavily from the lessons of recent election victories of Australia’s Labor leader Anthony Albanese and the German centre-left SPD leader Olaf Scholz, both regarded — like Starmer — as solid but relatively uninspiring leaders.

Albanese was in London in May and met senior Labour personnel at the residence of the Australian high commissioner, including Starmer, Lammy, McSweeney and defence spokesman John Healey.

Australia’s Labor party and the British Labour party have recently fought elections that have pitted them against the Australian campaign strategist Sir Lynton Crosby, who has advised right-of-centre parties in both countries.

“The Conservatives and the Australian Liberal party mimic each other because of the Crosby link,” said one senior Labour UK figure, saying that immigration was a common theme in previous elections.

“But Keir also gets on with Scholz as well. The way the SPD ran on a campaign of ‘respect’ echoes a lot of his thinking,” the figure added.

In spite of the increasingly close relationship between Labour and the Democrats in the US, Sunak’s relations with Biden have also warmed over the course of four meetings in the past four months.

The US president endorsed Sunak’s efforts to take a leadership role in regulating artificial intelligence after a 40-minute one-to-one meeting at the White House, which took place without officials, followed by formal talks.

“We are looking to Great Britain to help lead a way through this,” Biden said at a press conference. “There is no country we have greater faith in to help negotiate our way through this.” He added: “We are in lockstep.”