I'll do my best to explain and reply to Greavsies questions in this post - but bear with me, my brain is still foggy and putting anything in a logical order seems an impossible task at the moment.
Essentially when you have a budget deficit (the difference between what income the government receives each year and what it spends) it has to borrow, when there is a surplus (income greater than outgoings, it can put it into the reserves)
The Furlough scheme and has cost hundreds of Billions, but without it as our economy contracted because of the covid pandemic unemployment could easily have been three-fold what it is now, or even higher. Many families/people would be unable to support themselves at all.
So the government borrowed and kept them technically still employed.
But as we borrow more, so our national Debt has balloned to levels we haven't seen since the second World war - which from start to finish took almost 50 years to pay that debt off - this one will be of a similar duration I suspect, and attempts to increase income (higher taxes mostly) and lower spending could well mean we never come out of this economic contracted - so I don't expect to see any huge tax rises anytime soon.
leaving people with less money to spend now would be disastrous, it would also of course decrease vat income and consumption taxes.
The latest data shows that the
UK government borrowed £8.8bn in January, which was the the highest January figure since monthly records began in 1993, it has been estimated that government borrowing during this financial year (end in March will be around £400 billion - an unheard-of sum in modern/peacetime history.
This borrowing is done by the government issuing bonds/gilts (same thing different terms).
These are really promissory notes i.e. the Government tells the market how much interest a bond/gilt will attract and the buyers scoop them up for the income. Income paid by governments is about as 100% guaranteed as you can get. Fund managers have to keep a certain amount in 'cash' (liquidity reasons) and so this is as good as it gets for parking cash! The government sets a maturity date (the date it will repay them and you get your cashback - but of course you can sell them to other institutions whenever you like - these bonds are the paper equivalent of gold.
British bonds are sought after as our political/civil rules of commercial law make us a solid proposition to investors.
The buyers of these bonds, or "gilts", are mainly financial institutions, like pension funds, investment funds, banks and insurance companies, but also some foreign governments also buy into them to use them for reserves.
Even the Bank of England as part of its remit to boost spending and investment in the economy buy them. This policy is known as "quantitative easing" the BOE has so far bought £875bn of government bonds. QE is like issuing 'new' money - but there is a limit to it and go too far and you risk financial implosion and rampant inflation.
I still hold a Bond that my grandfather bought back in the second World war, it was a non-maturing bond of £10,000 and eventually written off as worthless, so bonds issued by the government can in times of distress be written off and rendered worthless.
In January 2020, our UK debt was £2.11 trillion, up £316.4bn since the start of the Pandemic.
This figure almost exceeds the size of the UK economy, with debt having reached 97.9% of the UK's
gross domestic product (GDP). GDP is the sum (measured in pounds) of the value of goods and services produced in the economy.
Debt levels as high as this haven't been seen since the early 1960s when the UK was paying off the debts of World War Two.
The bottom line is we cannot carry on like this for much longer, if we do foreign investors, institutional investors will demand higher rates for what they will see as an economy out of control and thus higher risk.
The chancellor has a very difficult tightrope to walk now, borrow too much and end up with interest payments that the government can't afford so has to cut public spending - thus risking a huge political push back as real pension payments shrink, pubic sector jobs disappear and no new spending on the NHS, defence, capital projects etc or (as he will have to at some point) hope the economy expands and collects more taxes as it does to meet the repayments and pay down the debt. The problem with what we've done now is that we've created a new state dependency the likes of we haven't seen even in wartime.
Sooner or later we're going to have to let businesses go bust and people be made redundant - what we've seen happen to the big retail chains may well happen in other sectors.
Are we in danger of our bonds becoming very expensive as confidence in our economic prospects wane? - almost certainly, at which point the government will be forced into a new austerity program and all that this entails. Mass unemployment is just around the corner which will be of a magnitude none of us has seen in our lifetime.
Our children will be paying this back for most of their lifetimes unless something I can't predict changes.