How much money is the UK government borrowing, and does it matter?

The UK government frequently finds itself in a situation where its spending exceeds the amount of money it collects through taxes. To bridge this financial gap, the government resorts to borrowing money. However, it is important to note that borrowing money comes with the obligation to repay it, along with interest, which can have significant implications for future tax and spending decisions. So, why does the government borrow money in the first place? The primary source of income for the government is taxes. For instance, individuals pay income tax based on their earnings, everyone pays VAT on certain goods, and businesses are taxed on their profits. In some years, the government manages to cover all its expenses solely through tax revenue, but there are also times when it cannot. When this occurs, the government has a few options: it can raise taxes, reduce spending, or borrow money. Increasing taxes can lead to individuals having less disposable income, which can negatively impact businesses and result in fewer job opportunities. Conversely, when the government borrows money, it can stimulate economic growth. Additionally, borrowing is often used to finance large-scale projects, such as the construction of new railways and roads, which are intended to bolster the economy. How does the government go about borrowing money? The government borrows funds by issuing financial instruments known as bonds. A bond is essentially a promise to repay borrowed money at a future date. Most bonds require the borrower to make regular interest payments throughout the bond's duration. In the UK, government bonds are referred to as 'gilts. ' These bonds are generally regarded as safe investments, with minimal risk of default. Financial institutions, both domestic and international, such as pension funds, investment funds, banks, and insurance companies, are the primary buyers of gilts. The Bank of England has also purchased substantial amounts of government bonds in the past to provide economic support. How much is the UK government currently borrowing? The amount borrowed by the government can fluctuate from month to month. For example, during January, many individuals submit their tax returns and pay a significant portion of their annual tax bill, resulting in a noticeable increase in government revenue. Therefore, it is more informative to examine the total borrowing over the course of a year. In the last financial year, which concluded in March 2024, the government borrowed £122. 1 billion. Recent monthly data indicates that this figure is £3. 2 billion lower than the same month in the previous year. The total amount owed by the government is referred to as the national debt, which currently stands at approximately £2. 7 trillion. This amount is roughly equivalent to the country's gross domestic product, or GDP. The current level of debt is more than double what it was from the 1980s until the financial crisis of 2008. The combination of the financial crash and the Covid pandemic has caused the UK's debt to rise from those historical lows to its present level. However, when compared to the size of the economy, the UK's debt figures remain relatively low in comparison to much of the last century and also in relation to some other major economies. How much interest does the government pay on its debt? As the national debt increases, the government is required to pay more in interest. This additional cost was not as pronounced when interest rates were low during the 2010s, but it has become more noticeable since the Bank of England raised interest rates. The amount of interest the government pays on its national debt can vary, and approximately a quarter of UK debt is indexed to inflation, meaning that payments are directly linked to inflation rates. When inflation rises, the cost of servicing the debt increases significantly, although these payments are currently beginning to ease. If the government has to allocate more funds to cover its debt obligations, it may have less available for public services, which were initially funded through borrowing. Why is it important to consider the implications of increased government borrowing? Some economists express concern that the government is borrowing excessively, which could lead to future financial challenges. On the other hand, there are those who argue that additional borrowing can facilitate faster economic growth, ultimately generating more tax revenue in the long run. For instance, the government announced a reduction in National Insurance during the March Budget, which is expected to have positive effects on the economy. The government aims to reduce the deficit to below 3% of GDP by the fiscal year 2025-26, which aligns with one of the financial targets set by the previous administration. However, the Office for Budget Responsibility (OBR) has previously cautioned that public debt could escalate as the population ages and tax revenues decline. An aging population results in a smaller proportion of working-age individuals, leading to decreased tax income while increasing pension payouts. In its latest forecasts, the OBR indicated that debt, relative to the size of the economy, is projected to rise over the next four years before experiencing a slight decline in the fifth year. Some economists contend that large economies like the UK can manage higher levels of debt, and the negative consequences are often overstated. What distinguishes the government deficit from the national debt? The deficit refers to the difference between the government's income and its expenditures. When the government spends less than it earns, it is said to have a surplus. Conversely, debt represents the total amount of money owed by the government, which accumulates over time. Debt increases when there is a deficit and decreases during years when there is a surplus.