22OCT

Index-linked gilts add £4bn to debt bill

3 min read

16:23UTC

September borrowing of £24.5bn ran £1.9bn over the OBR forecast, and debt interest alone, at £10.9bn, ran £2.0bn over.

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EconomicAssessed

Key takeaway

Debt interest of £10.9bn, £2.0bn over forecast, accounts for all of September's borrowing miss.

Public sector borrowing in September was £24.5bn, £1.8bn more than a year earlier and £1.9bn above the £22.6bn forecast by the Office for Budget Responsibility (OBR), the Office for National Statistics (ONS) reported on 21 October. Central government's debt interest was £10.9bn, £2.0bn above forecast, so interest alone covers the month's miss⁠¹.

Of that £10.9bn, £4.0bn was the uplift on index-linked gilts, government bonds whose repayment value rises with inflation. The ONS put it down largely to a 0.6% rise in the Retail Prices Index (RPI) between June and July. The Debt Management Office (DMO), the Treasury agency that sells government bonds, counted 24.4% of its gilt and Treasury bill portfolio as index-linked at the end of June⁠², and it sold £900m of an index-linked 2049 gilt on 3 September.

About a quarter of the government's gilt and bill stock is therefore index-linked, so a burst of inflation adds to the debt bill even as it erodes the rest. That partly blocks the inflation route out of debt that post-war governments used. Each month's overrun is itself borrowed, so September's £2.0bn interest miss adds to the interest bill on the months that follow.

Spending outran tax. Central government receipts rose 5.2% on the year to £90.1bn; its current spending grew 7.0% to £98.6bn. Cash came in better than the deficit: central government's net cash requirement, the cash it actually had to raise, was £16.9bn in September, £7.3bn below the OBR forecast⁠³.

Deep Analysis

In plain English

The government borrows by selling bonds called gilts. Most pay a fixed rate of interest. About a quarter are index-linked, meaning the amount the government owes rises with inflation. When prices jumped in the summer, the value of those index-linked gilts rose too. The statisticians count that rise as interest, even though the government only pays most of it when the bonds end. That is why September's interest bill of £10.9bn looks so high. The real cash the government had to raise in the month was lower than forecast.

Deep Analysis

Root Causes

The Retail Prices Index, not the Consumer Prices Index, still sets the uplift on most index-linked gilts. RPI usually runs above CPI, so the bill rises faster than the inflation measure the Bank of England targets.

The ONS records the uplift monthly as it accrues, using RPI from a few months earlier. That lag is why a June to July price rise lands in September's interest figure.

Current spending growth of 7.0% against receipts growth of 5.2% reflects commitments already locked in, including public sector pay and benefits uprated with past inflation.

What could happen next?

Consequence
Interest costs remain sensitive to every RPI print, so a fall in inflation would cut the monthly interest bill quickly.
Risk
If spending keeps growing faster than receipts, borrowing will overshoot even in months when inflation calms.

Source Landscape

This story draws on neutral-leaning sources

Primary parallel: In June 2022 a surge in the Retail Prices Index pushed monthly central government debt interest to about £19.4bn, then a record, through the same index-linked uplift. The spike reversed as inflation fell, without any change in the stock of debt.

Counter-parallel: The first index-linked gilt was sold in 1981 to persuade lenders that the government would not inflate its debt away. The design worked as a commitment device, and the September bill is the price of that promise.

Immediate: interest alone covers September's £1.9bn borrowing overshoot, and the index-linked uplift made up £4.0bn of the £10.9bn bill. The cash measure, the net cash requirement, ran £7.3bn under forecast at £16.9bn.

Structural: with 24.4% of the gilt and Treasury bill portfolio index-linked at 30 June 2026, on Debt Management Office figures, each surprise in RPI flows into the deficit within months. The gap between receipts growth and spending growth, 1.8 points this month, matters more over time than any single interest spike.

Consensus view: The Office for Budget Responsibility's fiscal risks reports have repeatedly flagged that UK debt interest reacts faster to inflation than most peers' because about a quarter of gilts are index-linked. September fits that pattern: one 0.6% monthly rise in the Retail Prices Index produced most of the interest overshoot.

Counter-view: The same inflation lifts receipts, which rose 5.2% on the year to £90.1bn, as frozen tax thresholds pull more income into higher bands. The uplift on index-linked gilts is also booked as it accrues but mostly paid at redemption, which helps explain why the net cash requirement came in £7.3bn under forecast.

Key tension: Whether an accrued interest cost that does not need cash this year should drive Budget choices as heavily as spending that does.

Sources:Office for National Statistics·UK Debt Management Office

Mentions:Office for National Statistics →Office for Budget Responsibility →Retail Prices Index →Debt Management Office →HM Treasury →Bank of England →

First Reported In

Update #5 · Debt passes £3trn, its ratio below forecast

Office for National Statistics· 22 Oct 2026

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Causes and effects

Caused by

ONS puts borrowing £8.1bn over OBR path

September's interest-driven miss added a sixth month to the overshoot the August figures recorded.

Occurred 22 Sept 2026

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This Event

Index-linked gilts add £4bn to debt bill

Interest, not weak tax receipts, explains September's miss, and about a quarter of the gilt and bill stock rises with inflation.

Different Perspectives

Pension Protection Fund

Acting chief actuary Aaron Pang put the rise to 135.0% funded down to liabilities falling 2.1% against a 1.0% fall in assets, reflecting higher gilt yields. On Lowdown's reading, the yields that lift the Treasury's interest bill leave 4,838 company schemes with a £280.7bn surplus that does not reduce state borrowing.

Torsten Bell

The Labour figure wrote on 14 October that the IMF's October figures show the fastest fiscal consolidation in the G7. The IMF forecasts the UK deficit falling from 3.8% of GDP in 2026 to 1.4% in 2031, a squeeze still to be delivered through taxes and spending.

Tax Justice UK

The left-leaning campaign group says ten tax reforms would raise over £60bn a year for public services, and on 22 October asked why higher taxes on extreme wealth remain politically difficult. It offers the tax-led exit to the IEA's cuts; the £60bn is its own claim, not an official costing.

Institute of Economic Affairs

The free-market think tank's Alternative Budget of 19 October would suspend the state pension triple lock for three years, freeze welfare in cash terms and move tax onto a wider VAT. It claims the day-to-day budget returns to surplus in 2027-28, its own projection rather than an official costing.

Resolution Foundation

The living-standards think tank said welfare spending ran about £2.5bn above expectations in September, City AM reported on 21 October, and its economist Greg Thwaites urged targeted energy support. Its figure lands as a Chancellor who calls welfare cuts a moral duty finalises the 28 October Budget.

Institute for Fiscal Studies

Director Helen Miller said a steady-as-she-goes Budget is not an option, with the IFS putting 2029-30 headroom at about £20bn, The Independent reported on 12 October. The IFS puts the cost of avoiding cuts and funding higher defence at around £35bn of tax rises or benefit cuts, more than any headroom estimate in circulation.

Written with AI from Lowdown's published reporting. Not individually reviewed by an editor. Editorial standards.