July 7, 2022

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Where does the Government borrow money from?

RISHI Sunak will focus on “critical support” for businesses and households in his Budget rather than push to balance the books, predicts a Cabinet colleague.

So where does the Government borrow money from?

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Rishi Sunak has a difficult task of repairing the public finances battered by coronavirus


Rishi Sunak has a difficult task of repairing the public finances battered by coronavirusCredit: AFP

Where does the Government borrow money from?

The government borrows money by selling bonds, explains the BBC.

Public finances have been battered by the coronavirus pandemic since it gripped the UK from early 2020.

The Government has been handing out huge sums of money to businesses and employees to prevent millions of people winding up unemployed.

The cost of the Chancellor‘s furlough scheme – which pays furloughed staff 80 per cent of their wages up to £2,500 a month – is £14billion a month, according to the Office for Budget Responsibility.

Raising taxes are one way to boost coffers.

But to do so during a brutal pandemic, when many people are struggling financially, or are at risk of losing jobs, would be unpopular.

So the government must borrow money as it spends more than it gets in income – mainly from income tax or VAT.

And this is where bonds come into play.

The chancellor faces a tough balancing act


The chancellor faces a tough balancing actCredit: PA:Press Association

The BBC says: “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.”

The Bank of England has snapped up £875billion of government bonds to help “boost spending and investment in the economy”, it adds.

Repayment terms can be as fast as one day – or stretch over decades.

How Rishi Sunak could use his Budget to start weaning the economy off the Bank Of England Money Tree
How Rishi Sunak could use his Budget to start weaning the economy off the Bank Of England Money Tree

How much did the Government borrow in 2020?

The Government borrowed a staggering £400billion over the past year – eight times more than in 2019.

Economist Liam Halligan wrote in The Sun in February 2021: “The pandemic has caused Britain’s deepest economic downturn in three centuries.

“Our locked-down economy has… struggled to generate tax.

“That has opened a vast hole in the public finances, with this year’s multibillion-pound deficit adding to our already huge national debt.”

Business Secretary Kwasi Kwarteng said Mr Sunak had acknowledged the country could not “go on spending money forever”.

“For now, what we have to do is support businesses, individuals, families, through what has been an extremely difficult time,” he told BBC Breakfast.

“We have got another three years to run in the parliament and the Chancellor will be looking to reduce the deficit.

“For now, I think the real emphasis is on trying to provide critical support.”

What is the Budget?

THE Budget is when the government outlines its plans for tax hikes, cuts and things like changes to the minimum wage.

It’s different to the Spending Review, which sets out how much public cash will go towards funding certain departments, devolved government’s and services, such as the NHS.

The Budget is read out in the House of Commons by the Chancellor of the Exchequer. It will be Rishi Sunak’s second Budget as Chancellor.

Mr Sunak’s first one in March last year has been dubbed the “coronavirus Budget” after it focused on supporting Brits financially through the crisis, rather than the government’s “levelling up” agenda as promised in the 2019 general election.

Normally, the Budget is held once a year but the unprecedented circumstances of the pandemic in 2020 saw Mr Sunak give a “mini-budget” in the Commons on July 8.

Boris Johnson promises Budget will be focused on a jobs-led recovery amid claims Brits set for tax rises