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Coronavirus: Where does the government borrow billions from?

·4-min read
Piggy bank under attack from a virus
Piggy bank under attack from a virus

The UK government is borrowing record-breaking amounts, to pay for measures designed to limit the impact of coronavirus.

Initiatives such as the furlough scheme are expensive and government income is down because lower wages and spending mean people are paying less tax.

Why does the government borrow money?

The government borrows because it spends more than it gets in income.

Most of its income comes from taxes - for example, income tax from your pay cheque or the VAT you pay on certain goods.

It could, in theory, cover all of its spending from taxes - and in some years that has happened.

But governments have not always been willing to increase taxes enough to cover their spending. This is partly for political reasons - it would be unpopular with voters.

There are also other reasons for not raising taxes. If higher taxes leave people with less money to spend, it can be bad for economic growth and jobs.

How much does the government borrow?

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 data shows that the UK government borrowed £8.8bn in January, which was the the highest January figure since monthly records began in 1993,

chart
chart

It has been estimated that borrowing could reach £393.5bn by the end of the financial year in March.

How does the government borrow money?

The government borrows money by selling 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.

Interest is also paid to whoever owns the bond in the meantime. So it's basically an interest-paying "IOU".

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.

Some also end up being bought by the Bank of England as part of its current attempts to boost spending and investment in the economy.

Under this policy - known as "quantitative easing" - the Bank has so far bought £875bn of government bonds.

Government bonds appeal to investors as they 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.

When does it have to be paid back?

It varies a lot.

Some government borrowing has to be repaid in a month, but some lending is for as long as 30 years.

The minimum repayment period is just one day, while some bonds have been issued for 55 years.

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.

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.

It covers most of this gap by borrowing, or sometimes by selling assets such as property.

Bank of England, City of London
Bank of England, City of London

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 is the total amount of money owed by the government that has built up over years. So it's a much larger sum.

Debt rises when there is a deficit, and falls in those years when there is a surplus.

In January 2020, it was £2.11 trillion, up £316.4bn since the start of the financial year.

debt
debt

The figure almost exceeds the size of the UK economy, with debt having reached 97.9% of the UK's gross domestic product (GDP). GDP is the sum (measured in pounds) of the value of goods and services produced in the economy.

Debt levels as high as this haven't been seen since the early 1960s when the UK was paying off the debts of World War Two.

The government does repay debt on due dates, but usually has to borrow new money - and take on more debt - to do so.

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