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#AceNewsDesk – The government faces a gap between the amount it raises in taxes and how much it wants to spend on public services.………..To bridge this gap it can borrow money, but this has to be paid back – with interest.

Why does the 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.

It could, in theory, cover all of its spending from taxes – and in some years that happens.

But if it can’t, it needs to either raise taxes and/or cut spending, both of which are generally unpopular. 

Higher taxes also 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 too.

So governments often choose to borrow to boost the economy if it looks at risk of slowing down. 

The government also borrows to fund major long-term projects such as new railways and roads, which it also hopes will help the economy grow.

Governments borrow to fund “day-to-day” spending, as well as long-term infrastructure projects like Crossrail

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 bond’s lifetime. 

UK government bonds – known as “gilts” – are normally considered very safe, with little risk the money will not be repaid.

Gilts are mainly bought by financial institutions in the UK and abroad, such as pension funds, investment funds, banks and insurance companies. 

The Bank of England has also bought trillions of pounds’ worth of government bonds in the past to support the economy, through a process called “quantitative easing”.

For example, in response to the financial turmoil caused by the government’s mini-budget in September 2022, the Bank bought gilts to help stabilise bond markets.

However, it has since resumed its previous plan to sell off some of the bonds it holds. 

How much is the UK government borrowing?

The total amount the government owes is called the national debt. It is currently £2.49tn. 

That is nearly as much as the value of all the goods and services produced in the UK in a year, known as the gross domestic product, or GDP.

But the amount it borrows varies from month to month. 

In January 2023, government borrowing fell because it received more money than expected in taxes, and spent less than predicted on its schemes to help with energy bills. This meant it had a £5.4bn surplus for the month.

In contrast, in December 2022, the government borrowed £27.4bn. That was £16.7bn more than in December 2021, and was the highest figure for any December since records began in 1993.

For the financial year to date – between April 2022 and January 2023 – the government has borrowed £118.4bn. That is down £9.9bn on the same period in 2021, and is £30.6bn less than predicted by the Office for Budget Responsibility (OBR), the government’s official forecaster.

However, the figure remains high compared to pre-Covid times. Why is UK economy lagging behind other rich nations?

Why does it matter if governments borrow more?

The larger the national debt gets, the more interest the government has to pay. The government paid £6.7bn in debt interest in January. That is the largest January interest bill on record. But that was much less than the £17.3bn interest it paid in December 2022 or the £19.4bn paid in June 2022.

The government is expected to spend more than £100bn in 2022 and 2023 on debt interest – more than it spends 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.What does a billion pounds look like… and what can it buy?What is the government’s plan for managing debt?

Most economists and politicians agree that debt cannot keep growing forever, because at some point it becomes impossible to pay the interest.

Governments often increase borrowing when they face unusually difficult situations, such as the coronavirus pandemic, or the current cost-of-living crisis. Chancellor Jeremy Hunt has blamed the “twin global emergencies of a pandemic and Putin’s war in Ukraine” for driving up government costs.He said it was “vital [that] we stick to our plan to reduce debt over the medium term”.Prime Minister Rishi Sunak also made reducing the national debt one of his five key promises, in order to “secure the future of public services”.

What is the difference between the government deficit and debt?

The deficit is the gap between the government’s income and the amount it spends.When a government spends less than its income, it has what is known as a surplus. Debt is the total amount of money owed by the government that has built up over years. It rises when there is a deficit, and falls in those years when there is a surplus.

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