Government Debt And Borrowing
Government debt is the total amount of money the government has borrowed and not yet repaid. In the UK, borrowing is used to fund spending when tax income is not enough to cover costs in a given year.
Having government debt is normal. Most countries operate with ongoing debt, rolling it over rather than paying it off entirely. The key issue is not whether debt exists, but how large it is, how much it costs to service, and what it is used for.
Common Misconception
A common misconception is that government debt works like household debt and should be paid off as quickly as possible. Governments do not operate like households. They borrow over long periods and refinance debt as it matures.
Another misunderstanding is that when government borrowing falls in a particular month or year compared to the previous month or year, then total debt is falling. That’s not the case. In reality, governments usually continue to add to their overall debt even when borrowing temporarily slows. It’s the rate of borrowing that is typically changing, not the overall amount of debt.
Why It Matters
Government borrowing can be beneficial if the money is used to support long-term economic growth. Spending on infrastructure, education, healthcare, and productivity can strengthen the economy and increase future tax revenues.
However, debt also has a cost. Servicing debt means paying interest to those who lend to the government. In the UK, debt interest payments now absorb a very large share of public spending. For example, in 2025 the cost of servicing government debt was roughly twice what the UK spends annually on defence. Servicing large government debt significantly limits how much money is available for other priorities.
How It Works
The UK government borrows money by issuing debt, mainly in the form of government bonds known as gilts. Investors such as pension funds, banks, companies, and individuals buy gilts. In return, they receive interest payments (for gilts these are called coupons) and the promise that their money will be repaid in the future.
The interest rate the government must pay is influenced by several factors:
- The bond market’s view of the UK’s financial credibility
- Interest rates set by the Bank of England to control inflation
- Expectations about future economic growth and inflation
If investors believe the government is spending responsibly and the economy is stable, they are willing to lend at lower interest rates. If spending appears uncontrolled or future growth looks weak, investors demand higher interest to compensate for the perceived risk.
Higher interest rates increase the cost of servicing debt, which feeds back into Budgets and limits future spending choices.
Key Points
- Government debt is normal and exists in most countries.
- Borrowing can be beneficial if it supports long-term economic growth.
- Debt servicing costs reduce money available for public services.
- The UK borrows by issuing gilts, which pay interest to investors.
- Interest costs are shaped by markets, inflation, and economic outlook.
Myth Buster
A fall in monthly or yearly government borrowing does not usually mean government debt is falling. Total government debt often continues to rise.
The core idea is simple: government debt is neither automatically good nor bad. What matters is how much it costs, how it is used, and whether the economy grows strongly enough to support it.