Where Does the Government Borrow Money From?

If you are looking for a short term loan in the UK and are wondering where the government borrows its money from, then continue reading to find out more. During the coronavirus pandemic, the UK Government borrowed a record-breaking amount to limit the impact of the virus. The Government took a financial knock during this time, as they collected less money through taxes. This BBC article explains it perfectly.

How Much Money Has the Government Borrowed?

The United Kingdom Government borrowed a large sum of money over a twelve-month period in the 2021 to 2022 financial year. In fact, they borrowed £143.7 billion. This is the third highest amount borrowed since 1947. In June 2022, the UK Government borrowed another £22.8 billion, which is the second highest borrowing level in June since 1993.

The government borrows money to make up any difference between its expenditure and what it collects, which is known as public sector net borrowing, often referred to as a deficit.

What Are the Reasons the Government Borrows Money?

The UK Government will borrow money when they spend more than they get in. Most of their income comes from taxes, such as VAT and income taxes. The government has not always been willing to increase taxes to cover their spend amount. But at the same time, higher taxes can leave people with less money for spending, which impacts jobs and economic growth.

Where Does the Government Borrow Money From?

The UK Government borrows money by selling bonds, which are promises to make payments by a certain date to whoever hold the bond. There is usually a large payment on the final date. The person holding the bond is also paid interest. There is a buyer of the bonds, which is financial institutions, which includes investment funds, insurance companies, pension funds, and banks.

Some of the bonds have been purchased by the Bank of England, in an attempt to boost investment and spending in the economy. The Bank of England has purchased £875 billion of government bonds and £20 billion in UK corporate bonds.

Government bonds are less risky to investors and are considered safe, which is why the government is able to raise funds with ease.

When Does the Government Need to Repay Borrowed Money?

When must the monies borrowed be repaid is a complex question, not easy to answer. Some government borrowing is repaid within one month, while others can be repaid in thirty years. It depends on who purchases the bond, their interest, and the terms.

In most cases, the minimum repayment period is one day and then there are some government bonds that have been issued for fifty years or more.

Understanding the Difference Between Government Debt and Deficit

A deficit is how much the government income is short, based on what it spends each year. The gap is covered through borrowing money, sometimes they sell assets, such as property.

In financial years where the government will spend less than it brings in, this is known as a surplus. It’s important to not confuse debt and deficit, even though they are so closely linked. Debt is the money the government owes, which has built up over years and is a large sum of money. The deficit, on the other hand, is when the government falls short, based on the income they bring in compared to the amount they have spent.

The UK government’s debt does rise when there is a deficit. Even though the government has a good reputation for paying their debts by the due date, they do usually borrow more money to repay the debt. This causes a vicious financial borrowing cycle, the same as a private person can experience when taking on too much debt.