How Governments Borrow Money and How It Affects You & Future Generations by Clive Hall

The UK government borrows money to finance its spending when it exceeds tax revenue, or to fund specific projects. This annual borrowing creates a Deficit, and the accumulation of past borrowing constitutes the National Debt.

The annual deficit and the total national debt are often measured against Gross Domestic Product (GDP), which is a key indicator of a country’s economic health, reflecting the total value of goods and services produced within its borders, typically over a year. Notably, the national debt has risen from 28.3% of GDP in 2001 to 95.8% in 2025 (Source: Statista – UK Government Debt 2025).

Of course, some borrowing can be good. Take a simple example: when an individual borrows within their means to buy a home. This saves them paying rent, gives them more control over where they live, and buys them a real asset—all positive outcomes.

However, excess debt is dangerous—such as when someone borrows from one credit card just to pay off another. Worse still, if their total debt keeps rising to fund a lifestyle they cannot afford. Eventually, this leads to stress and severe consequences. Mr. Micawber was not wrong:
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
(David Copperfield, by Charles Dickens)

Unfortunately, this is exactly what the British government has done—and continues to do. It borrows from one set of creditors to pay off debts to others, while the total debt continues to rise because government spending keeps exceeding income. The last UK budget surplus was in 2000/01 (Source: House of Commons Library, The Budget Deficit: A Short Guide, SN06167.pdf).

They also seem to embody Micawber’s hopeful—yet ultimately unhelpful—expectation that “something will turn up” to improve the situation. In the novel, there was a happy ending for him, but only after a complete change in lifestyle.

Many politicians and economists claim that government debt cannot be compared to household debt, because governments can simply print more money. But that causes inflation, which eventually hurts everyone.

(As an aside: the government has no money of its own. There is no ‘pot of gold’. It collects taxes and typically spends it all within the same year.)

Most government debt—including newly added debt each year—is financed through the sale of government bonds. These are essentially interest-paying IOUs sold to investors. They are seen as low-risk investments because the UK government is considered unlikely to default. Buyers include pension funds, insurance companies, households, and overseas investors—including other governments.

Government bonds have various names:

• Gilt-edged securities or “gilts”—so named because the original certificates had gilded edges;

• Fixed interest investments—as the government guarantees a fixed annual interest payment (the ‘yield’);

• Fixed-term investments—the principal is repaid only at the end of a term, typically between five and thirty years.

They are perhaps most commonly referred to as the “bond markets”, “international bond markets”, or sometimes just “the markets”.

How it Works

The first UK government bonds were issued in 1694 to finance a war with France. Bonds issued in previous decades are now maturing (coming due for repayment). But the government doesn’t have the cash to repay these old debts, so it issues new bonds to repay old creditors—and to cover current excess spending. Hence, the comparison with borrowing from one credit card to pay off another.

For example 10 year bonds issued in 2015 (at around 2% p.a. interest) are now maturing for repayment in 2025. But interest rates have risen since then – yields on UK 10 year gilts are now around 4.6% p.a. (Source: markets.ft.com 26/05/25). So although the government can “roll over” the old debt, in this example the annual interest we pay on that borrowing has doubled. (I say “we pay” because of course the taxpayer pays for most government spending.)

In 2023/24 alone, the government’s debt interest payments totalled £107 billion—equivalent to 3.9% of GDP, or 8.7% of all government spending. To put that in context, the same year the UK spent:

• £19.9 billion on Housing and Community Amenities,

• £47.7 billion on Public Order and Safety,

• £56.8 billion on Defence, and

• £111.5 billion on Education.
  (Source: HM Treasury, Public Spending Statistics: July 2024 – GOV.UK)

It should be remembered that much of these current borrowing costs are being paid at historic rates of interest which are currently lower than those available today, which means there is real potential for future borrowing costs to increase sharply.

Historically the UK has enjoyed a high credit rating – but one sure way to jeopardise that is to continue to allow the National Debt to rise as continued Deficits push it up as a percentage of GDP, risking higher interest costs in future.

(Side note: the 10-year bond yield for Greece was 3.32% on Monday, May 26 [tradingeconomics.com]—lower than the UK’s. But in 2012, it peaked at 41.77%. Sudden and dramatic changes can and do happen.)

How Does This Affect You?

The current situation is unsustainable. If borrowing and borrowing costs continue to rise, the government will face two options:

1. Increase taxes even further—making life harder for everyone, or

2. Drastically cut public spending—reducing public services.

Either outcome will negatively impact all of us. Ultimately, the international bond markets will force action by either refusing to lend (a “bond strike”) or demanding impossibly high interest rates.

So What’s the Answer?

When you’re in a hole, stop digging.
We could send the Chancellor a copy of David Copperfield, but that might not help.

We must take control of the UK’s finances—for the sake of our futures. The first step is to change the direction of government, both locally and nationally. It’s not rocket science. It’s just a decision:

• Introduce common-sense government that immediately identifies and eliminates wasteful, ineffective, uneconomic, and counterproductive spending.

• Stop burdening future generations with debt to fund today’s luxuries and ideological indulgences. That isn’t just madness—it’s immoral.

• Bring back good jobs by making more here in the UK. Reindustrialise and cut energy costs by ending net zero.

• Make work pay by reducing income tax, increasing the incentive to work.

• Make risk pay by cutting capital taxes to encourage business growth in Britain.

We know only Reform UK is committed to doing this. That’s why we need a Reform government—and we need the British people to vote for it and support it.

Join Reform UK. Work for it. Stand for it.

With sincere thanks to Clive Hall, Chair of Reform UK Reigate and former Financial Planner (now retired) for his clarity and insights in preparing these notes. His work makes complex financial issues accessible and relevant to us all.