The British government is piling up debts worth tens of billions – but where does the money come from?
The country’s debt will likely top £2.5 trillion by the end of the year – increasing by at least £200 billion in a year, mostly due to financial hand-outs during the COVID-19 pandemic.
So who is lending Britain such vast amounts, and how does the government manage such huge sums of debt?
Britain’s National Debt By Numbers
According to the website National Debt Clock, government debt grows at £5,170 a second or £310,000 a minute.
That’s equivalent to £41.27 for everyone living in the country.
What Is Government Debt?
Government debt is simple math. When a government spends more than comes in, the balance is borrowed. Economists call this the budget deficit.
The £2 trillion owed by Britain is not all current debt. Most of the money is the running total of debt racked up by previous governments.
Total debt will increase due to funding the coronavirus pandemic, as most of the billions involved were borrowed to support businesses, workers and households.
The Chancellor may have to borrow even more if the economy fails to get back on track as tax revenues will fall, leaving a significant spending gap.
Who Does The Government Borrow From?
Not many lenders have billions of pounds lying around, so the government has a limited number of places to go with the begging bowl when more money is needed.
The biggest lenders are insurance companies and pension funds. Data from the House of Commons library reckons these institutions hold a third of the nation’s debt.
Foreign investors hold another 28 per cent of Britain’s debt.
The Bank of England has 23 per cent of the debt from buying government bonds as part of the quantitative easing program that has run since the financial crisis of 2009. So instead, the Treasury hands the bonds – also called T-bills or gilts – to the bank, which prints money to inject into the economy.
National Savings & Investments (NS&I), the government-owned bank that offers premium bonds, holds around 10 per cent of the national debt.
The remaining debt is held by financial institutions at home and overseas.
Gilts And Bills Explained
A little-known government department called the Debt Management Office (DMO) auctions gilts and T-bills for the government.
Gilts from solid economies like the UK, France, Germany and the USA are sought after by investors as the likelihood of any of these countries going bankrupt is remote.
How gilts work
A gilt or bond is a promise by the government to pay the owner the face value amount on the date the bond matures. During the bond’s life, the government pays interest at the rate quoted on the contract every six months.
Bonds last for a fixed term, which ends on the maturity date.
The interest payment is sometimes called the coupon.
Investors can trade their gilts, so the holder at maturity is not necessarily the original lender.
Most government bonds last for a fixed time over the medium (seven years) to long term (15 years). A few are for the short term (three to seven years) or ultra short term (less than three years).
What is a T-bill?
T-bills – or Treasury bills – encompass a much smaller amount of government debt than gilts.
T-bills are short term loans to the government that last for no more than a year.
So The DMO Juggles The Deficit?
Precisely, the DMO manages the nation’s debt.
During any year, some gilts and T-bills will mature so that the DMO will repay the loan for the government.
However, the government might roll the debt over by borrowing more money to settle the debts.
So managing the debt involves adding any new debt and rolling over any old debt that the government cannot afford to pay in cash.
The DMO sells gilts by auction several times a year.
In 2020-2021, the DMO forecast the government would borrow £156 billion, comprising £97 billion of rolled over debt and £59 billion of new borrowing.
How Much Does The National Debt Cost?
Besides the face value of gilts and T-bills, the government must pay interest on the debt.
Rates of interest can vary depending on the type of gilt, the fixed term and market trends when the money was borrowed.
The effective rate on gilts bought by the Bank of England is lower than the face value coupon rate of the bond as the official bank rate is applied rather than market rates.
The current official interest rate is 0.1 per cent – the lowest level the rate has ever reached and where it has sat since March 2020.
Roughly every person in the country has a £30,661 share of the national debt.
How Does The UK National Debt Compare?
Each country measures national debt as a percentage of the gross national product (GDP).
GDP is the value of finished goods and services produced in a country during a specific time.
The final figures are a snapshot of a country’s economic health during that time.
In March 2021, the UK national debt is roughly 106 per cent of GDP, which means the deficit stands at 6 per cent more than the economy produced, according to data from the Office for National Statistics (ONS).
The British national debt is a nudge over the average for the European Union.
Japan has the highest national debt of 234 per cent of GDP, followed by Greece, with 182 per cent of GDP.
At the opposite end of the scale, the prosperous kingdom of Brunei has a national debt of just 2 per cent of GDP.
UK v European Union national debt (March 2021)
UK National Debt FAQ
Britain’s economic outlook was not hugely strong before Brexit and the coronavirus pandemic. However, months of closed businesses and furlough hand-outs to millions have workers have left the economy struggling to keep pace. As a result, the Chancellor expects to take out £45 billion in extra borrowing to pay for the pandemic.
Many other countries have seen COVID-19 cripple their economies. The International Monetary Fund (IMF) says 36 of 70 limited income countries were already ‘economically distressed’. For instance, Argentina, Lebanon, Zambia and Ecuador are seeking debt restructures.
Debt sucks money out of the economy that could be spent on other initiatives – like infrastructure, jobs, the National Health Service, and even reducing the nation’s debt pile. Debt can also drive inflation which makes goods and services more expensive for everyone.
Yes, but an economy flush with cash is likely to see inflation surge upwards. So the bank has to maintain a careful balancing act to ensure everyone has enough money to buy what’s needed and to match economic trends.
Simple maths – successive governments have spent more than the country has earned. So the gap between income and expenses is the national debt.
The precise figure varies with the amount of debt, interest rates and other economic trends. However, the Treasury estimates that paying the interest each year costs around £43 billion.
Below is a list of related articles you may find of interest.