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Where does the government borrow billions from?

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Piggy bank under attack from a virusImage source, Getty Images

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

Initiatives such as the furlough scheme - which finished in September 2021 - were expensive, and government income fell because it collected less money in tax during the pandemic.

How much has the government borrowed?

The latest figures show that in the 2021-22 financial year, which covers the 12 months to the end of March, government borrowing was £143.7bn, according to the Office for National Statistics (ONS).

It is the third-highest amount for a full financial year since records began in 1947, although it is less than half of the £309.6bn borrowed in the same period a year earlier.

In June 2022, the government borrowed £22.9bn. This was up by £4.1bn from a year earlier, and was the second-highest June level since monthly records began in 1993.

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 often referred to as "the deficit".

Why does the government borrow money?

The government chooses to "borrow" when 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.

Image caption,
It has been suggested extra money could be raised for the NHS by borrowing more

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 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.

Media caption,

What does a billion pounds look like... and what can it buy?

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 and £20bn of UK corporate bonds.

Government bonds appeal to investors as they are seen as essentially safe - with little 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.

Image source, Getty Images
Image caption,
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.

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