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How much money is the UK government borrowing, and does it matter?
November 21, 2019
Updated June 21, 2024
Image source, Getty Images
The government generally spends more than it collects in taxes.
To fill this gap, it borrows money, but that money has to be repaid – with interest – and can influence broader tax and spending plans.
Why does the government borrow money?
The government obtains most of its revenue through taxes. For example, workers pay tax on income, everyone pays VAT on certain goods and companies pay taxes on their profits.
It could, in theory, cover all your expenses with taxes, and in some years it does.
But if it can’t, it will cover the gap by raising taxes, cutting spending or taking out loans.
Higher taxes mean people have less money to spend, so companies make less profit, which can be negative for jobs and wages. Lower profits also mean companies pay less tax.
Thus, governments often borrow to boost the economy. They also take out loans to pay for big projects – like new railways and roads – that they hope will help the economy.
Image source, Getty Images
Image caption, Governments borrow to finance “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 life of the bond.
UK government bonds – known as “gilts” – are normally considered very safe, with little risk of the money not being repaid.
Gilts are mainly purchased by financial institutions in the UK and abroad, such as pension funds, investment trusts, banks and insurance companies.
How much is the UK government borrowing?
The amount the government borrows varies from month to month.
For example, when people file tax returns in January, they often pay a large portion of their annual tax bill at once, so the government sees a jump in the amount of money it receives.
Therefore, it is more useful to look at the entire year or year-to-date.
The total amount the government owes is called the national debt. It is currently around £2.7 trillion.
This current level is more than double that observed since the 1980s until the 2008 financial crisis.
The combination of the financial crisis and the Covid pandemic has pushed UK debt from historic lows to its current level.
But relative to the size of the economy, the UK’s debt figures are still low compared to much of the last century, and also compared to some other leading economies.
How much money does the government pay in interest?
The higher the national debt, the more interest the government will have to pay.
This additional cost was not as large when interest rates owed were low during the 2010s, but it is more noticeable now that interest rates have been rising.
Around a quarter of the UK’s debt is indexed, meaning payments are directly linked to the rate of inflation. The increase in prices in the last two years has significantly increased the debt service bill.
If the government has to set aside more money to pay its debts, that could mean it has less to spend on the public services it borrowed to finance in the first place.
The most significant figures tracking the cost of debt are published monthly by the Office for National Statistics (ONS).
According to this data, two months of 2022 saw record levels of money set aside for debt interest: £20.2 billion in June and £18 billion in December.
The most recent figures from May 2024 revealed that interest on the public debt was £8 billion.
What is the government’s debt plan?
Prime Minister Rishi Sunak reduced the national debt one of his five main promises and government finances are a key focus in the run-up to the general election.
Chancellor Jeremy Hunt previously said the government will make “difficult but responsible” decisions about the public finances.
He previously blamed the “twin global emergencies of a pandemic and Putin’s war in Ukraine” for rising government costs.
The chancellor has set a target of reducing underlying debt within five years.
Labor also committed in its manifesto to respecting this fiscal rule.
The government’s official economic analyst, the Office for Budget Responsibility (OBR), has predicted that debt will fall as a percentage of the economy to 92.9% by 2028-29.
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 debt helps the economy grow faster – generating more tax revenue in the long run.
It would fall to less than 3% of GDP by 2025-26, complying with one of the financial rules that the government decided to establish.
But the OBR has previously warned that public debt could rise as the population ages and tax revenue falls.
In an aging population, the proportion of people of working age decreases, which means the government charges less taxes and pays more pensions.
In its latest forecasts in March, the OBR said that debt, measured relative to the size of the economy, is still expected to rise over the next four years, before falling marginally in the fifth year.
What is the difference between government deficit and debt?
The deficit is the difference between the government’s revenue 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 accumulated over the years.
It increases when there is a deficit and decreases in years when there is a surplus.