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Government Borrowing

Why does the government borrow money?

Taxes are the primary source of funding for the government; for example, employees are subject to income tax, everyone must pay sales tax on certain items, and businesses must pay tax on their earnings.

Theoretically, taxes could pay for all of its expenses, and occasionally this does occur. But if it can't, it will have to reduce expenditure or raise taxes, both of which are unpopular in general.

In order to boost the economy when it appears to be in danger of slowing down, governments frequently choose to borrow money. Additionally, governments borrow money to pay for large, long-term initiatives like new roads and trains, which they believe will also stimulate economic growth.

How does the government borrow money?

Selling financial goods known as bonds allows the government to borrow money. A bond is an agreement to make future payments of money. Most demand that the borrower pays regular interest payments in the interim. UK government bonds, or "gilts," are typically thought of as being quite safe, with little chance that the money will not be repaid. 

The majority of buyers of gilts are banks, insurance companies, investment funds, pension funds, and other financial institutions based in the UK and abroad. In the past, the Bank of England used a procedure known as "quantitative easing" to purchase government bonds totalling trillions of pounds in order to stimulate the economy.

For instance, the Bank purchased gilts to aid in the stabilisation of the bond markets in reaction to the financial chaos brought on by the government's mini-budget in September 2022. It has, however, subsequently picked up on its earlier strategy of selling some of the bonds it holds.

How much is the UK government borrowing?

The government borrowed £27.4 billion in December 2022. The biggest amount for any December since records began keeping track in 1993, it was £16.7 billion higher than in December 2021.

The national debt is the total sum of money owed by the government. Right now, it is £2.5 trillion.


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