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

The UK government often finds itself in a situation where it spends more money than it brings in through taxes. To bridge this financial gap, the government resorts to borrowing money, which needs to be repaid with interest. This borrowing is essential for funding both day-to-day expenses and major infrastructure projects like the Elizabeth Line.

One may wonder why the government borrows money instead of solely relying on tax revenue. While taxes are a primary source of government income, they may not always cover all expenses. In such cases, the government can either raise taxes, cut spending, or opt for borrowing. However, increasing taxes can have negative repercussions on the economy by reducing consumer spending and business profits. To avoid this, borrowing is often preferred to stimulate economic growth and fund essential projects such as new transport networks.

The government borrows money by issuing bonds, known as “gilts.” These bonds are considered safe investments, attracting financial institutions like pension funds, banks, and insurance companies. By selling short and long-term gilts, the government can borrow money over various periods with different interest rates.

The amount the UK government borrows fluctuates monthly, with borrowing in the last financial year totaling £151.9 billion. The national debt currently stands at around £2.8 trillion, equivalent to the country’s GDP. While this debt has increased significantly due to events like the financial crisis of 2008 and the Covid-19 pandemic, it remains manageable compared to historical levels and other leading economies.

As the national debt grows, so does the interest the government must pay. This cost becomes more prominent when interest rates rise, impacting the government’s budget for public services. While some economists express concerns about excessive borrowing, others argue that it can stimulate economic growth and increase tax revenue in the long run.

In response to changing economic conditions, the government may adjust its borrowing targets and redefine measures of debt, like public sector net financial liabilities (PSNFL). This broader measure includes various financial obligations, such as student loan repayments, providing a more comprehensive view of the country’s financial position.

Understanding the difference between debt and deficit is crucial. Debt represents the total amount owed by the government, accumulated over time. On the other hand, the deficit reflects the gap between government income and spending. A surplus occurs when the government spends less than it earns, leading to a decrease in debt, while a deficit results in increased borrowing and debt accumulation.

In conclusion, government borrowing plays a vital role in maintaining economic stability, funding essential projects, and managing financial obligations. By balancing borrowing with sound fiscal policies, the government can navigate economic challenges and support sustainable growth.