The British newspaper The Times issued a stark warning this week, declaring that “Britain is bankrupt.” This grim conclusion was not explicitly stated by the Office for Budget Responsibility (OBR) — the think tank behind the UK’s budget planning — but its latest 65,000-word report leaves no doubt: the country is facing an unprecedented financial crisis.
The reason? A policy launched more than four decades ago, when the British government decided to issue inflation-linked bonds known as “linkers.”
At the time, these bonds were seen as an innovative step to protect investors from currency erosion. However, soaring inflation after the COVID-19 pandemic has turned them into a catastrophic burden on the state treasury.
Debt Costs Britain More Than Education and Defence Combined
According to The Times, the cost of servicing the national debt rose from £25 billion ($32.3 billion) in 2020 to £105 billion ($135.6 billion) in the last fiscal year.
By comparison, the British government spends £60 billion ($77.5 billion) annually on education, £55 billion ($71 billion) on defence, and £20 billion ($25.8 billion) on policing.
This surge in spending was not random; it was driven by the policies of issuing linkers, whose value ballooned alongside the Retail Price Index (RPI), which peaked at 14.2% in 2022.
According to the newspaper’s analysis, these bonds alone added £62.8 billion ($81 billion) in interest payments during 2022 and 2023.
How Did It Begin?
The roots of this policy date back to 1981, when Geoffrey Howe was Chancellor of the Exchequer under Margaret Thatcher’s government.
As The Times reports, these bonds were introduced at a time when the British government was struggling to borrow, especially after the economic crises of the 1970s.
The aim was to reassure markets that the money borrowed would retain its real value, which boosted investor confidence and later helped reduce borrowing costs, as investors accepted lower yields on these bonds in exchange for inflation protection.
There was strong demand for these bonds, particularly from pension funds that needed financial instruments to secure long-term real returns. Back then, The Times described this type of debt as a “smart innovation” that met market needs and saved the treasury money.
A Complete Reversal
However, the equation shifted dramatically after 2020. According to The Times, the British government had, for decades, issued inflation-linked bonds at a much higher rate than its G7 counterparts.
In 2022, inflation-linked debt accounted for 25% of Britain’s total public debt — compared to 12% in Italy, 7% in the United States, and less than 5% in Germany.
As a result, interest payments on UK debt rose between 2019 and 2022 at a faster pace than in any other OECD country.
According to the Office for Budget Responsibility, these costs will continue rising, reaching £132 billion ($170.4 billion) per year by 2030.
Reeves Handcuffed as “Bond Vigilantes” Watch Closely
Today, Chancellor Rachel Reeves finds herself unable to deliver on her promises while investors keep a watchful eye on government bonds, eyeing with suspicion any move that might weaken fiscal discipline.
These investors have earned the nickname “bond vigilantes.”
The newspaper warns that any hint of expanding spending without adequate funding would immediately drive up the interest rates demanded by investors to lend to the government, threatening borrowing plans that exceed £250 billion ($322.5 billion) this year.
Treasury sources told The Times that former finance ministers were drawn to the low yields on these bonds, despite warnings about their long-term risks. One source added that “hot” demand from pension funds made the decision even more tempting, before admitting: “We went too far with issuing these bonds.”
Who Is to Blame?
While no one has been officially held responsible, The Times points to the role of the UK Debt Management Office (DMO), an advisory body established in 1998. It was then headed by Sir Robert Stheeman, who resigned in 2024 and earned an annual salary of £145,000 ($187,000). Although he did not explicitly call for issuing more linkers, he repeatedly described them as a “key pillar in Britain’s financing programme.”
His successor, Jessica Pulay, continued to stress the “strong demand from markets” for these bonds — but the DMO’s role remained advisory only, carrying out government decisions.
In the mid-2010s, the House of Lords Economic Affairs Committee issued a theoretical warning about “public finances being exposed to inflation shocks” due to the heavy reliance on these bonds. But this warning was not taken seriously at the time. Only the OBR began ringing the alarm clearly in 2017.
In 2018, then-Chancellor Philip Hammond announced a gradual plan to reduce the share of these bonds in total debt. Between 2018 and 2023, the proportion fell from 23.5% to 12.4% — but The Times notes this came too late.
A Hidden Policy to Curb Ministry Spending
Some leaks cited by the newspaper suggest that, for years, the Treasury quietly used inflation-linked bonds as an undeclared tool to restrain spending by ministries and the Prime Minister’s Office.
Any fiscal expansion would push inflation higher — automatically raising debt servicing costs and making extra spending politically and economically costly.
While The Times notes this theory remains unproven, it says what cannot be denied is that Britain’s experience with inflation-linked bonds will remain a long-term burden on future chancellors and reshape the UK’s fiscal policies for years to come.
Source: The Times
