The government generally spends more than it raises in tax. To fill this gap it borrows money, but that has to be paid back – with interest.
One of the way it can borrow money is by selling financial products called bonds.
A bond is a promise to pay money in the future. Most require the borrower to make regular interest payments.
UK government bonds – known as “gilts” – are normally considered very safe, with little risk the money will not be repaid.
Gilts are mainly bought by financial institutions in the UK and abroad, such as pension funds, investment funds, banks and insurance companies.
Servicing the current national debt in the UK is forecast to take up 7% of total public spending, but that forecast was based on lower government borrowing rates.
Number 10 said there was “no doubt about the government’s commitment to economic stability” and “meeting our fiscal rules is non-negotiable” saying that only the OBR’s forecast is an accurate predication of the government’s room for manoeuvre.
The clear indication from the government is that although they will not hold another Budget in March, any necessary adjustment would have to come in terms of some new spending cuts.
This morning, a £2bn auction of 30 year UK government debt, sold at an effective interest rate of 5.18%.
The Debt Management Office, a part of Treasury, effectively paid the highest interest rates for these very long term loans that have been since 1998.
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