The UK’s budget deficit hit £139.2 billion in the 2022/23 tax year, according to the latest figures from the Office for National Statistics (ONS).
Chancellor of the Exchequer Jeremy Hunt said the high government borrowing figure could be blamed on the impacts of support payments during the Covid-19 pandemic and the cost of energy bills grants. But he ignored the impact of his predecessor, Kwasi Kwarteng, who - along with his boss, the former Prime Minister Liz Truss - sparked a major economic crisis with their Mini Budget in September 2022. The shocks to the nation’s finances the pair caused are covered by the new ONS data.
The swathe of unfunded tax cuts the former PM’s administration announced spooked markets, which temporarily crashed the value of the pound, almost saw pension funds go under, and brought about the biggest single interest rate hike by the Bank of England in more than 30 years. The key knock-on impact was that the cost of borrowing got more expensive. Rishi Sunak’s government opted to try to repair the damage by hiking taxes to record levels.
Record inflation has also done its part to drive up the cost of public borrowing. It remains just one percentage point below the peak of 11.1% recorded in October 2022.
But where does the UK borrow money from - and what does public borrowing mean in practice?
What does borrowing mean?
Every year, the government raises money through taxes which are usually set out in an annual Parliamentary event known as the Budget.
It uses this money to fund public services, invest in infrastructure and pay for the welfare state, amongst other things. If the government spends more money than it raises through taxation and other income, it has to ‘borrow’ to cover the deficit - i.e. the gap between the money it has and the money it needs.
Should a deficit repeatedly appear on the public’s balance sheet over a period of time, it becomes known as the national debt. But while you will often hear politicians compare the nation’s finances to the budget of, say, a business or a household, they work in a different way.
For example, debt can be very long-term - as much as 55 years - and can come with cheap interest rates, meaning the economic gains created by the borrowing may pay off the extra costs of servicing the debt over time. The International Monetary Fund (IMF) describes it as “an important way for governments to finance investments in growth and development”.
Running deficits and gaining debt can also be politically useful, as a government could become unpopular if it raises taxes too much. And, if a recession occurs - an event which can reduce the amount of money taxation provides - a government is likely to increase borrowing to fund public services.
Problems mainly arise if a country defaults on its debt, i.e. cannot or will not pay it back. Building up too much national debt over time is also harmful, as it increases the amount of interest the governmenth as to pay out. If this happens, it tends to mean it becomes more expensive to borrow and economic output may be impacted.
Where does the UK borrow money from?
The money the UK borrows comes from the private sector, usually financial institutions like pension funds and banks. It raises this cash from bonds - also known as gilts.
These are basically promises to pay the lender back with interest over a certain period of time, with the bulk of this cash repaid on the final date of the bond. The payments before the end of the bond’s lifespan tend to consist of interest.
Overall, the private sector views these loans as a low-risk way of investing. This is because they guarantee regular repayments over what is often a long period of time.
But they do carry some risk, as inflation can wipe out interest if the bond is not index-linked. Likewise, at the government’s end, issuing bonds (i.e. borrowing) becomes more expensive if inflation is high as investors will want to make a return in exchange for their cash. The index-linked bonds it issues are also likely to become more expensive when inflation is high.
Sometimes, the Bank of England (the public body in charge of the UK’s currency) buys them through a process known as quantitative easing - essentially printing money. This activity aims to boost spending and investment with the hope that it will heighten UK economic output. The central bank was forced to embark on a massive bond-buying exercise in the aftermath of Liz Truss and Kwasi Kwarteng’s disastrous mini budget in a bid to prop up pension funds.
What do the latest UK borrowing statistics show?
According to figures for the 2022/23 financial year that were released by the ONS on Tuesday (25 April), the UK borrowed £139.2 billion - the fourth highest annual figure on record. It was also £18.1 billion more than the size of the deficit in the previous year.
Energy bills support for households and businesses accounted for £41.2 billion spent over the winter months, with debt interest payments surging to £106.6 billion as a result of high inflation - a 47% year-on-year leap. But, the overall borrowing figure was actually £13.2 billion lower than had been forecast by the Office for Budget Responsibility (OBR) last month.
Jeremy Hunt said: These numbers reflect the inevitable consequences of borrowing eye-watering sums to help families and businesses through a pandemic and [Vladimir] Putin’s energy crisis.” He added: “We stepped up to support the British economy in the face of two global shocks, but we cannot borrow forever. We now have a clear plan to get debt falling, which will reduce the financial pressure we pass on to our children and grandchildren.”
However, commentators pointed out that some of the issues faced by the Chancellor had come about as a result of the Conservative Party’s own making - particularly the Mini Budget. Danni Hewson, head of financial analysis at AJ Bell, described Hunt’s plans to get the national debt falling as a proportion of GDP in just five years’ time as nigh “impossible”.