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Coronavirus: Where do governments borrow money? How much money is the UK government borrowing, and does it matter?
(almost 3 years later)
The government has taken wide-ranging steps to try to limit the economic impact of coronavirus. The government is spending more on public services than it raises in tax.
But measures such as the furlough and job support schemes will be expensive. And government income is down because, when people earn and spend less, they don't pay as much income tax and VAT, for example. To bridge this gap it borrows money, but this has to be paid back - with interest.
That means the government will have to borrow a lot more than it expected. Why does the government borrow money?
Why does a government borrow money? The government gets most of its income from taxes. For example, workers pay income tax, everyone pays VAT on certain goods and companies pay tax on their profits.
The government borrows because it spends more than it receives in revenue, which comes mainly from taxes. It could, in theory, cover all of its spending from taxes, and in some years that happens.
It could, in theory, cover all of its spending from taxes - and in some years that has happened. But if it can't, it needs to either raise taxes, cut spending or borrow.
But governments have not always been willing to increase taxes enough to cover their spending, partly for political reasons - it would be unpopular with voters. Higher taxes mean people have less money to spend, so businesses make less profit, which can be bad for jobs and wages. Lower profits also mean companies pay less tax.
It's also down to economic reasons - if people have less to spend, it is bad for economic growth and jobs. And in the current crisis, trying to raise more from taxes simply wouldn't work. So, governments often borrow to boost the economy. They also borrow to pay for big projects - such as new railways and roads - which they hope will help the economy.
How much does the government borrow? Governments borrow to fund "day-to-day" spending, as well as long-term infrastructure projects like Crossrail
The amount the government borrows to make up the difference between what it spends and what it collects is known as "public sector net borrowing". It is also often referred to as "the deficit".
The latest figures show that the UK government borrowed £35.9bn in August, which was £30.5bn more than it borrowed in August last year.
There used to be some government debt which never had to be repaid, sometimes known as perpetual bonds. But the government chose to repay the last of these in 2015.
The big increase in the deficit after the 2008 financial crash was caused by an increase in government spending, and a fall in how much it was receiving in taxes.
How does the government borrow money?How does the government borrow money?
The government borrows in the financial markets, by selling bonds. The government borrows money by selling financial products called bonds.
A bond is a promise to make payments to whoever holds it on certain dates. There is a large payment on the final date - in effect the repayment. A bond is a promise to pay money in the future. Most require the borrower to make regular interest payments over the bond's lifetime.
Interest is also paid to whoever owns the bond in the meantime. So it's basically an interest-paying "IOU". UK government bonds - known as "gilts" - are normally considered very safe, with little risk the money will not be repaid.
The buyers of these bonds, or "gilts", are mainly financial institutions, like pension funds, investment funds, banks and insurance companies. Private savers also buy some. Gilts are mainly bought by financial institutions in the UK and abroad, such as pension funds, investment funds, banks and insurance companies.
Some also ends up being bought by the Bank of England under its "quantitative easing" programme. The Bank of England has also bought hundreds of billions of pounds' worth of government bonds in the past to support the economy, through a process called "quantitative easing".
The appeal to the investors is that UK government bonds are seen as essentially safe - there is no risk that the money won't be paid. You won't lose your money and you know precisely when and how much the payments will be. How much is the UK government borrowing?
When does it have to be paid back? The amount the government borrows varies from month to month.
It varies a lot. For instance, when people submit tax returns in January, they often pay a large chunk of their annual tax bill in one go, so the government sees a jump in the amount of money it takes in.
Some government borrowing has to be repaid in a month, but some lending is for as long as 30 years. So it is more helpful to look at the whole year, or the year-to-date.
The minimum repayment period is just one day, while some bonds have been issued for 55 years. In the 2022-23 financial year, the government borrowed £130.6bn. That was £9.4bn higher than the previous year.
In July this year, the government borrowed £4.3bn, which was the fifth-highest borrowing figure for July since records began in 1993.
The total amount the government owes is called the national debt. It is currently about £2.58 trillion.
That is roughly the same as the value of all the goods and services produced in the UK in a year, known as the gross domestic product, or GDP.
That current level is more than double what was seen from the 1980s through to the financial crisis of 2008.
The combination of the financial crash and the Covid pandemic pushed the UK's debt up from those historic lows to its current level.
But in relation to the size of the economy, today's debt is still low compared with much of the last century, as shown above, and also compared with some other leading economies.
Why does it matter if governments borrow more?
The larger the national debt gets, the more interest the government has to pay.
That extra cost was not as big when the interest rates due were low through the 2010s. But it is more noticeable now that interest rates have been rising.
Two months in 2022 saw record levels of money set aside for debt interest: £20bn in June and £18bn in December. The third largest amount came in June 2023, when interest payments hit £12.8bn.
In July 2023, debt interest was £7.7bn.
During the last financial year, the government spent £111bn on debt interest - more than it spent on education.
Some economists fear the government is borrowing too much, at too great a cost.
Others argue extra borrowing helps the economy grow faster - generating more tax revenue in the long run.
The government's official economic forecaster, the Office for Budget Responsibility (OBR), has warned that public debt could soar as the population ages and tax income falls.
In an ageing population, the proportion of people of working age drops, meaning the government takes less in tax while paying out more in pensions.
The OBR says debt could rise to more than 300% of GDP by 2070.
It also says climate change poses a "significant" risk to government finances.
What does a billion pounds look like... and what can it buy?
What does a billion pounds look like... and what can it buy?
What is the government's plan for debt?
Responding to the OBR report, Chancellor Jeremy Hunt said the government would take "difficult but responsible" decisions on the public finances.
He previously blamed the "twin global emergencies of a pandemic and Putin's war in Ukraine" for driving up government costs.
The chancellor has set a target of getting underlying debt to fall in five years' time.
Prime Minister Rishi Sunak also made reducing the national debt one of his five key promises.
Is Sunak keeping his five key promises?
What is the difference between the government deficit and debt?What is the difference between the government deficit and debt?
The deficit is the amount by which the government's income falls short of what it spends each year. The deficit is the gap between the government's income and the amount it spends.
It covers most of this gap by borrowing, or sometimes by selling assets like property. When a government spends less than its income, it has what is known as a surplus.
In years when a government spends less than its income, it is known as a surplus.
The deficit is not to be confused with debt, although both are linked.
Debt rises when there is a deficit, and falls in those years when there is a surplus.
Debt is the total amount of money owed by the government that has built up over years.Debt is the total amount of money owed by the government that has built up over years.
So it's a much larger sum. In August 2020, it was £2.024 trillion, £249.5bn more than at the same point last year. It rises when there is a deficit, and falls in those years when there is a surplus.
That figure now exceeds the size of the UK economy, the highest level of debt seen since the 1960s. Related Topics
The government does repay debt on the due date, but usually has to borrow new money anyway. UK government
Economics
UK taxes
GDP
Cost of living
UK economy
Bank of England
UK government spending
Pound Sterling (GBP)