RISHI Sunak will focus its budget on “critical support” of businesses and households rather than pushing to balance the books, a fellow cabinet member predicts.
So where does the government borrow money from?
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Rishi Sunak has a difficult job mending public finances hit by the coronavirusImage credit: AFP
Where does the government borrow money from?
The government borrows money by selling bonds, the BBC explains.
Public finances have been hit by the coronavirus pandemic since it hit the UK from early 2020.
The government has given huge sums of money to businesses and employees to help prevent millions of people from becoming unemployed.
The cost of the Chancellor’s vacation program, which pays employees on leave 80 percent of their wages up to £ 2,500 a month, is £ 14 billion a month, according to the Bureau of Household Responsibility.
Tax increases are one way to boost coffers.
But to do so during a brutal pandemic, when many people are in financial trouble or at risk of losing jobs, would be unpopular.
So the government has to borrow money because it spends more than it makes – mostly from income tax or sales tax.
And this is where bonds come into play.
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Says the BBC, “A bond is a promise to make payments to whoever holds it on certain dates. On the end date, there is a large payment – indeed the repayment.
“In the meantime, interest is also being paid to those who own the bond. So it is essentially an interest-paying ‘bond’.
“The buyers of these bonds or” gilts “are primarily financial institutions such as pension funds, mutual funds, banks and insurance companies.”
The Bank of England raised £ 875 billion in government bonds to “stimulate spending and investment in the economy,” she adds.
The repayment conditions can be up to a day – or extend over decades.
What is national debt?
When the government spends more than it gets on taxes and other income, it has to borrow.
This is sometimes referred to as the government budget deficit.
The government needs to borrow more during the coronavirus pandemic, the Commons Library says.
Over 85% of total government debt was raised through the sale of gilts and bills, mostly to financial institutions.
Gilts and bills are ways to borrow money from the government.
They are auctioned off by the Debt Management Office (DMO).
The DMO is the government’s debt management agency. The sale of gilts and bills finances government borrowing.
A buyer of gold lends money to the government for a period of time.
This is known as the maturity of gold. In return, the owner of the gold receives an interest payment.
Insurance companies and pension funds are the largest holders of gilts and bills, accounting for around 32% of the total.
Another 28% are held abroad.
How much did the government borrow in 2020?
The government borrowed a staggering £ 400 billion last year – eight times more than in 2019.
Economist Liam Halligan wrote in The Sun in February 2021: “The pandemic has caused the UK’s deepest economic downturn in three centuries.
“Our locked economy has … had trouble generating taxes.
“That opened a big hole in public finances and this year’s billions of pounds deficit adds to our already huge national debt.”
Economy Minister Kwasi Kwarteng said Mr. Sunak recognized that the country could not “spend money forever”.
“Right now we have to support businesses, individuals and families at an extremely difficult time,” he told BBC Breakfast.
“We still have three years to run for office in parliament, and the Chancellor will try to reduce the deficit.
“Right now, the real focus is on trying to provide critical support.”
What is the budget?
The budget is when the government outlines its plans for tax hikes, cuts, and things like changes in the minimum wage.
It is different from the Spending Review, which sets out how much public money is used to fund specific departments, decentralized governments, and services like the NHS.
The budget is read out by the Chancellor of the Exchequer in the House of Commons. It will be Rishi Sunak’s second budget as Chancellor.
Sunak’s first in March last year was dubbed the “coronavirus budget” after focusing on helping the UK financially through the crisis rather than on the government’s agenda promised in the 2019 general election.
Usually the budget is held once a year, but in the unprecedented circumstances of the 2020 pandemic, Mr Sunak gave a “mini-budget” in the House of Commons on July 8th.
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