The government has taken wide-ranging steps to try to limit the economic impact of coronavirus.
But measures such as the furlough scheme will be expensive. And government income is down because, when people earn and spend less, they don’t pay as much income tax and VAT, for example.
That means the government will have to borrow a lot more than it expected.
Why does a government borrow money?
The government borrows because it spends more than it receives in revenue, which comes mainly from taxes.
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, partly for political reasons – it would be unpopular with voters.
It’s also down to economic reasons – if people have less to spend, it is bad for economic growth and jobs. And in the current crisis, trying to raise more from taxes simply wouldn’t work.
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”.
New figures show that borrowing in April was £62.1bn. That is about £930 per person in the UK.
It is the highest monthly figure on record (the figures go back to 1993) and almost as much as the whole of the last financial year.
The figure for the entirety of the previous financial year – April 2019- March 2020 – is estimated to be £62.7bn.
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.
The big increase in the deficit after the 2008 financial crash was caused by an increase in government spending, and a fall in how much it was receiving in taxes.
How does the government borrow money?
The government borrows in the financial markets, 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.
The appeal to the investors is that UK government bonds 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.
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 like property.
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 rises when there is a deficit, and falls in those years when there is a surplus.
Debt is the total amount of money owed by the government that has built up over years.
So it’s a much larger sum. The debt owed by the UK government climbed by £32.1bn to £1,798.5bn between October 2018 and 2019, says the Office for National Statistics.
The government does repay debt on the due date, but usually has to borrow new money anyway.