Where Does The Government Go To Borrow Money ?

27/05/2020

The following is an article from BBC Online and explains how this works:

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. 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.

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?

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.

Written by Colin Caulfield | Director

Colin is a Chartered Financial Planner & Pension Adviser Of the Year Read more >>

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