During the 2022-23 fiscal year, the UK government borrowed a total of £134.1 billion. When the government’s spending on public services exceeds its tax revenue, they borrow money to fill the gap. Raising taxes alone would reduce people’s disposable income and business profits, which could be detrimental to employment and wages. Therefore, the government typically borrows money to stimulate the economy and fund large-scale projects like new railways and roads.
The government borrows money by selling financial products known as bonds and pays regular interest during the bond’s term. Compared to other bonds, UK government bonds are considered highly secure with minimal risk of default, making them attractive to some financial institutions as investment products.
The borrowing amount for the 2022-23 fiscal year increased by £12 billion compared to the previous year, and borrowing has been on an overall upward trend in recent years. In May of this year, the government borrowed £20 billion, making it the second-highest borrowing for the month of May since 1993. The current total amount owed by the government (national debt) is approximately £2.57 trillion, roughly equivalent to one year of the UK’s GDP, which is more than double the debt level during the 1980s to the 2008 financial crisis.
Two major events in recent years, the financial crisis and the COVID-19 pandemic, caused the UK’s debt to rise from historically low levels to its current level. However, in relation to the size of the economy, the current debt remains relatively low compared to much of the previous century.
It’s worth noting that bond interest rates are also linked to the benchmark interest rate. During the low-interest-rate period in the 2010s, the cost of national borrowing was not high, but now, with rising interest rates, the government’s interest payments are rapidly increasing. In June 2022, interest payments reached £20 billion, and in December, they were £18 billion, setting records. In the last fiscal year, the government spent £111 billion on debt interest, which was more than its spending on education.
Some economists are concerned about the government borrowing too much and the potential high cost, especially as the aging population leads to declining tax revenue and higher pension expenditures, leading to soaring public debt. In response to concerns and predictions about debt remaining higher than GDP, Chancellor of the Exchequer Jeremy Hunt stated that the government would need to make ‘difficult but responsible’ decisions on public finances, and set a target to reduce the underlying debt over the next five years.