The UK government often spends more than it collects through taxes, creating a funding gap that must be covered. To bridge this shortfall, the government borrows money – and, like any borrower, it must pay back not just the principal, but also interest.
Why Does the Government Borrow?
Most of the government’s income comes from taxes. Workers contribute through income tax and National Insurance, consumers pay VAT on goods and services, and businesses are taxed on profits.
In theory, tax revenues could cover all spending, and occasionally they do. But more often, governments must either raise taxes, reduce spending, or borrow to balance the books.
Raising taxes can slow consumer spending and reduce company profits, ultimately lowering tax revenues. Cutting spending can have social and political costs. Borrowing, therefore, often becomes the preferred option, especially to support the economy or fund major infrastructure projects such as railways and roads.
How Does the Government Borrow?
The UK raises funds by selling government bonds, known as gilts. These bonds represent a promise to repay lenders with interest over time.
Gilts are widely regarded as safe assets, purchased by pension funds, investment firms, banks, and insurers both domestically and internationally. They come in both short- and long-term varieties, each with different maturity periods and interest rates.
How Much Is Being Borrowed?
Government borrowing fluctuates month by month. For example, January typically sees lower borrowing as tax receipts rise from annual payments.
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In the financial year ending March 2025, borrowing reached £148.3 billion.
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In July 2025 alone, borrowing fell to £1.1 billion, down from £3.4 billion in July 2024.
Currently, the UK’s national debt – the total owed over time – stands at around £2.9 trillion, roughly equivalent to the country’s entire annual GDP.
This level is more than double what was typical before the 2008 financial crisis, inflated by both that crisis and the Covid-19 pandemic. Still, relative to GDP, UK debt remains lower than much of the past century and below some peer economies.
The Cost of Interest
The bigger the debt, the higher the interest bill. During the 2010s, ultra-low interest rates kept these costs manageable. But since 2021, as the Bank of England has raised rates, the burden has grown.
In July 2025, the government spent £7.1 billion on interest payments alone – slightly higher than the previous year.
Why Does This Matter?
When a larger share of government revenue goes toward debt servicing, less is available for public services and investment. This creates a policy dilemma: borrow too much, and the cost of servicing debt may spiral; borrow too little, and growth opportunities could be missed.
Economists remain divided. Some warn that high borrowing threatens fiscal stability, while others argue that strategic borrowing can fuel growth, which eventually generates more tax revenue.
The government has pledged to ensure debt falls as a share of the economy within five years. However, in October’s Budget, Chancellor Rachel Reeves broadened the definition of debt (switching to public sector net financial liabilities, or PSNFL) to provide more flexibility for investment.
Downing Street has emphasized that fiscal rules remain non-negotiable, underscoring its commitment to economic stability.
Debt vs. Deficit – What’s the Difference?
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Debt is the total amount the government owes, built up over many years.
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Deficit is the annual shortfall between spending and income.
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When revenues exceed spending, a surplus occurs, reducing overall debt.
