Rishi Sunak is worried about rising interest rates. He should relax

PANDEMICS ARE an expensive business for governments. In the past year the British state’s borrowing came to more than 14% of GDP, the highest figure in over seven decades. All that extra borrowing helped push the ratio of government debt to GDP from around 80% to nearly 100%.

For the moment this is proving less costly than expected. Debt may have risen but interest costs have fallen. In the financial year to March, interest payments amounted to 1.1% of GDP, down from 1.7% the year before. But that could change. Like a homeowner with a large mortgage nervously eyeing an interest-rate calculator, Rishi Sunak, the chancellor, is worried about what will happen if it does.

The Office for Budget Responsibility, a fiscal watchdog, has helpfully done the sums for Mr Sunak. He has taken to peppering his speeches with a warning that if interest rates and inflation were both to rise by one percentage point then the exchequer’s interest bills would increase by £25bn ($35bn), an amount equivalent to the Department for Transport’s annual budget. Underpinning the Treasury’s worry is a fear that quantitative easing has had a paradoxical impact on public finances: helping to contain borrowing costs for now, but increasing the government’s exposure to short-term interest rates.

Since 2009 the Bank of England’s quantitative-easing...