The government spends more on public services than it raises taxes.
To close that gap, it borrows money, but that money must be repaid — with interest — and that can influence broader tax and spending plans.
Why does the government borrow money?
The government gets most of its revenue from taxes. For example, workers pay income tax, everyone pays VAT on certain goods, and businesses pay taxes on their profits.
In theory, it could cover all its expenses through taxes, and that happens in some years.
But if he fails to do so, he will close the gap by raising taxes, cutting spending or borrowing.
Higher taxes mean people have less money to spend, and therefore companies make less profit, which can hurt jobs and wages. Lower profits also mean companies pay less taxes.
So governments often borrow to stimulate the economy. They also borrow to finance big projects – such as new railways and roads – which they hope will help the economy.
How does the government borrow money?
The government borrows money by selling financial products called bonds.
A bond is a promise to pay money in the future. Most require the borrower to make regular interest payments over the life of the bond.
UK government bonds – known as “gilts” – are normally considered very safe, with little risk that the money will not be repaid.
Gilts are primarily purchased by financial institutions in the UK and overseas, such as pension funds, investment trusts, banks and insurance companies.
How much is the UK government borrowing?
The amount borrowed by the government varies from month to month.
For example, when people file their taxes in January, they often pay a large portion of their annual tax bill all at once, so the government sees an increase in the amount of money it collects.
It is therefore more useful to look at the entire year or the year to date.
In the 2022-23 financial year, the government borrowed £127.8 billion. This is £5 billion more than the previous year.
The total amount owed by the government is called the national debt. It currently stands at around £2.6 trillion.
This current level is more than double that observed between the 1980s and the financial crisis of 2008.
The combination of the financial crash and the Covid pandemic has caused the UK’s debt to rise from historic lows to its current level.
But relative to the size of the economy, today’s debt figures remain low compared to much of the last century, as noted above, and also compared to other leading economies. plan.
How much money does the government pay in interest?
The more the national debt increases, the higher the government must pay interest.
This additional cost was not as significant when interest rates owed were low in the 2010s, but it is more visible now that interest rates are rising.
If the government has to set aside more cash to pay its debts, that may mean it will have to spend less on the public services it borrowed for in the first place.
The most significant figures for the cost of debt are published monthly by the Office for National Statistics (ONS).
According to this data, two months in 2022 saw record levels of money set aside for debt interest: £20 billion in June and £18 billion in December.
June 2023 saw the third largest monthly amount – £12.8 billion.
The most recent figure for October revealed that interest on the national debt stood at £7.5 billion.
In the 2022-23 financial year, the government spent £108 billion on debt interest, more than it spent on education.
Why is it important for governments to borrow more?
Some economists worry that the government is borrowing too much, at too high a cost.
Others argue that additional borrowing helps the economy grow faster, generating more tax revenue in the long run.
In an aging population, the proportion of people of working age falls, meaning the government takes less tax while paying more in pensions.
The OBR estimates that debt could reach more than 300% of GDP by 2070.
He also says that climate change constitutes a “significant” risk for public finances. Other economists argue that large economies like the UK could borrow much more than they currently do, and that the negative impact is largely exaggerated.
What is the government’s plan in terms of debt?
Responding to the OBR report, Chancellor Jeremy Hunt said the government would make “difficult but responsible” decisions on the public finances.
He previously blamed the “double global emergency of a pandemic and Putin’s war in Ukraine” for driving up government costs.
The Chancellor has set a target of reducing underlying debt within five years.
What is the difference between public deficit and public debt?
The deficit is the gap between the government’s revenues and the amount it spends.
When a government spends less than its revenues, it has what is called a surplus.
Debt is the total amount of money owed by the government that has accumulated over the years.
It increases in the event of a deficit and decreases in years when there is a surplus.