Public borrowing

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Public borrowing and debt

Governments must borrow if their revenue is insufficient to pay for expenditure - a situation called a fiscal deficit. Borrowing, which can be short term or long term, involves the sale of government securities.

Bonds are long term securities that pay a fixed rate of return over a long period until maturity, and are bought by financial institutions and companies looking for a safe return. Bonds issued by the government are called gilts - short for gilt-edged, meaning they are as good as gold and payment of interest and at redemption is guaranteed. Treasury bills are issued into the money markets to help raise short term cash, and last only 90 days, whereupon they are repaid.

Local government borrowing

If the revenue from the council tax and central government support is insufficient to meet spending commitments, local authorities can also borrow by issuing bonds. Only around 25% of local authority spending is financed by local revenue raising, 75% coming from central government and by borrowing.

(Source: Local Government Association)

Public Sector Net Borrowing

If the borrowing requirements of both central and local government is combined, the amount of borrowing required is called the public sector net borrowing (PSNB).  The need to borrow varies considerably with the business cycle.

During periods of economic growth, tax yields rise and spending on welfare payments fall, pushing the public finances towards a surplus.  During periods of economic slowdown, tax yields fall and welfare payments rise, pushing the economy towards a fiscal deficit.

In 2009, the government introduced a new measure of public sector borrowing, called Public Sector Net Borrowing Ex (PSNBEx). This measure excludes payments to the financial sector to ease the credit crisis.

See: Public Sector Net Borrowing

Source: www.statistics.gov.uk

The Chancellor’s golden rules for borrowing

The Chancellor’s golden rules for sustainable investment are firstly, to balance the books over a trade cycle, and secondly, only to borrow to fund capital projects, such as road building.

Borrowing, and the financial crisis

According to the Institute for Fiscal Studies (IFS), the central government net borrowing requirement in 2009, of approximately £150b, was almost double initial estimates. The main reason for this overshoot was the rescue package for the banking sector, following the global financial crisis.This package included:

  1. £37b for recapitalization of the main banks, RBS, Lloyds and HBOS.

  2. £21b to the Bank of England to help refinance the financial services sector.

Source: IFS, 2009

Fiscal deficits and the National Debt

Fiscal deficits occur when the revenue received by a government is less than spending during a financial year. These deficits will create the need to borrow by selling government securities - bills and bonds.

What is the national debt?

The national debt is the cumulative amount of annual borrowing that occurs when government spending is greater than revenue.

National debt
Hypothetical example to illustrate how the national debt is calculated. 

£b 2014 2015 2016 2017
Government
Spending
500 550 600 650
Revenues 480 520 560 670
Borrowing 20 30 40 - 20
Annual fiscal deficit 20 30 40 - 20 (surplus)
Public debt 20 50 90 70

What causes a rising national debt?

A rising national debt can happen when tax revenues fall and government spending rises as the economy slows down or goes into recession, or when householders and firms spend less, so less VAT is collected, and householders and firm receive less income, so revenues from income taxes fall.

The UK national debt, 1992 - 2015

Government debt | amCharts

Greek debts

In 2010, Greece needed a massive bail-out from other members of the euro area to cope with debts which were estimated to be running at over 120% of GDP.

Irish debts

In the wake of the financial crisis Ireland had a public deficit in 2010 the equivalent of 32% of its GDP, over ten times the limit set as part of the Stability Pact. To help save the Irish economy from meltdown, and in an attempt to shore up the Euro, the Euro-16 along with the IMF agreed a financial rescue package of €750b. (See European Financial Stability Fund)

See: Fiscal stabilisers and discretionary tax policy

 


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