When you say the government is borrowing billions of pounds - who is it borrowing it from?

Answer 1

The Government borrows money by selling bonds, explains the BBC.

Public finances have been battered by the coronavirus pandemic since it gripped the UK from early 2020.

The Government has been handing out huge sums of money to businesses and employees to prevent millions of people winding up unemployed.

The cost of the Chancellor's furlough scheme - which pays furloughed staff 80 per cent of their wages up to £2,500 a month - is £14billion a month, according to the Office for Budget Responsibility.

So the Government must borrow money as it spends more than it gets in income - mainly from income tax or VAT.

And this is where bonds come into play.

A bond is a promise to make payments to whoever holds it on certain dates. There is a large payment on the final date - in effect, the repayment.

Interest is also paid to whoever owns the bond in the meantime. So it's basically an interest-paying 'IOU'.

The buyers of these bonds, or "gilts", are mainly financial institutions, like pension funds, investment funds, banks and insurance companies.

The Bank of England has snapped up £875billion of government bonds to help boost spending and investment in the economy.

Repayment terms can be as fast as one day - or stretch over decades.

Answer 2

Developed nations, such as the UK, can borrow by issuing GILTs (Gilt-Edged Securities). These are fixed term bonds that pay a regular coupon (interest payment) as well as redemption payment at the end of the term. They are listed in the FT.

Example, "4% Treasury Stock 2012". This tells you that for every one of these gilts you hold, you will receive interest of 4% of the face value of the Gilt per annum and the redemption date is 2009. At the redemption date you will receive the face value of the gilt which is fixed at outset.

The interest rates are low on Gilts compared to other institutions because they are the safest investments as they are issued by the Government. The UK government has never defaulted on any gilt coupon or redemption.

When the government issues a new set of Gilts it does so via auction. This is how it raises money apart from taxation.

Answer 3

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