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1. What is the budget deficit and how big is it?

When the government spends more than it receives in tax and other revenues it borrows to cover the difference. This borrowing is known as ‘public sector net borrowing’ but is often referred to as the deficit.

In 2020/21, government revenue – from taxes and other receipts – was £794 billion while government spending was £1,112 billion (£1.1 trillion).   The deficit was therefore £318 billion, equivalent to 14.8% of GDP, which is a peacetime record.  As we discuss below, the budget deficit ballooned because of the coronavirus pandemic.

Borrowing financed around 29%, or around £1 in every £3.50, of public spending in 2020/21. Borrowing of £318 billion is equivalent to around £4,800 per head of the UK’s population.

2. Why has the budget deficit increased during the pandemic?

The deficit reached a peacetime record in 2020/21 for two reasons:

  1. the Government provided pandemic support to public services, households and businesses during the pandemic, which cost around £229 billion;
  2. the virus and the lockdowns aimed at slowing its spread took the economy into a severe recession. Less economic activity meant smaller tax receipts and more government spending on areas such as unemployment benefits.

Government spending increased from 39.1% of GDP in 2019/20 to 51.9% in 2020/21. While government revenues fell in cash terms, they became larger relative to the size of the economy. This was because the economy shrank more than revenues did. Government revenues were equivalent to 36.7% of GDP in 2019/20 and 37.1% of GDP in 2020/21.

Public spending and revenues

The pandemic’s effect on future deficits will largely depend on how long coronavirus remains a significant public health concern and the extent of any long-term damage to the economy.

The Library briefing Coronavirus: Economic impact discusses the coronavirus pandemic’s effect on the budget deficit.

3. What are the trends over time?

It is not unusual for the government to borrow. Since 1970/71, the government has had a surplus (spent less than it received in revenues) in only six years. The last budget surplus was in 2000/01.

Since 1970, the average annual budget deficit is 3.6% of GDP. It has varied significantly over this period as the chart below shows. Aside from 2020/21, large budget deficits occurred in the mid-1970s and early 1990s and more recently after the 2008-2009 financial crisis.

Public sector net borrowing, % GDP

In 2021/22, the budget deficit will be lower than in 2020/21, as the public health emergency of the pandemic has been less acute. The budget deficit is forecast to be £128 billion, equivalent to 5.4% of GDP. Borrowing is forecast to fall further over the coming years as all government pandemic-related support ends and tax revenues improve with a growing economy. Tax rises announced by the Chancellor in 2021 will bring in extra revenues.

4. How does the UK’s budget deficit compare with other countries?

Governments across the world are borrowing more due to the coronavirus pandemic. The International Monetary Fund (IMF) say that across advanced economies borrowing averaged 10.8% of GDP in 2020. For the G7 group of advanced economies borrowing averaged 12.2% of GDP. 

The IMF report UK government borrowing of 12.5% of GDP in 2020. Amongst the G7 countries, only the US borrowed more than the UK, relative to the size of their economies.

International comparisons of borrowing

5. How is the budget deficit met?

The budget deficit is financed by sale of government bonds.  These are essentially interest paying “IOUs” which the government sells to investors.  Purchasers of government bonds include pension funds, insurance companies, households and overseas investors. The bonds make up most government debt. Once the bonds have been bought, they can be traded by investors on secondary markets. The Library Insight Coronavirus: Government debt, an explainer discusses further.

The Government has sold record amounts of bonds during the coronavirus pandemic, which is unsurprising given the size of its deficit. Investors were lending to the Government at relatively low rates of interest prior to the pandemic and continued to do so during much of the pandemic. Rates of interest have been rising recently.

The Bank of England bought large quantities of government bonds from investors on the secondary market.  The Bank did this to support the economy during the coronavirus pandemic, through its quantitative easing programme. The purchases also made it easier and cheaper for the Government to sell new bonds. 

Further information is available in the Library briefing paper Coronavirus: Economic impact.

6. How much interest does the government pay on its borrowing?

Interest payments on borrowing are a significant part of government spending. Interest is paid on all outstanding government debt, accumulated over many years. In 2020/21, gross debt interest payments were £39 billion; net debt interest payments were £24 billion. Here, the net figure accounts for the debt interest saved by the Bank of England holding some government debt, as explained below.

The lower net interest figure is a consequence of the Bank of England holding significant amounts of government debt, through its quantitative easing programme. The Bank has bought government debt from private investors such as pension funds and insurance companies largely to get money into the economy. The Government pays a lower rate of interest on the debt while it is held by the Bank, compared with what it would pay if the debt was held in the private sector. This is because the Bank is part of the public sector.  

Net debt interest spending is forecast to be high in 2022/23, relative to recent trends. This is largely because the interest paid on around one quarter of the Government’s debt is linked to inflation, which is expected to be high in 2022/23. Interest rates are also expected to be higher than they currently are.

Government debt interest, % GDP

7. What is the current budget deficit?

The current budget deficit is the difference between government’s day-to-day spending and its revenues, or more formally its current spending and current receipts. This measure differs from the overall budget deficit as it does not include government’s net investment spending.

The current budget deficit was £246 billion in 2020/21, equivalent to 11.5% of GDP.

Current budget deficit, % GDP

8. What is the structural deficit?

A distinction is often drawn between the cyclical and structural elements of the budget deficit.  The size of the deficit is influenced by the state of the economy: in a boom, when the economy is above its potential, tax receipts are relatively high and spending on unemployment benefit is low.  This reduces the level of borrowing.  The reverse happens in a recession when borrowing tends to be high. 

The structural deficit is that part of the deficit that is not related to the state of the economy.  This part of the deficit will not disappear when the economy recovers.  It thus gives a better guide to the underlying level of the deficit than the headline figure. The structural deficit cannot be directly measured so it must be estimated.

9. What is the difference between the deficit and government debt?

The deficit is the difference between government revenue and spending, usually measured over a single financial year. Debt is the total amount owed by the Government which has accumulated over the years. Debt is therefore a much larger sum of money. At the end of 2020/21 public sector net debt was £2,134 billion (i.e. £2.1 trillion), or 94% of GDP. This is equivalent to around £32,000 per person in the UK.

Government’s borrowing during the coronavirus pandemic has meant that public sector debt has risen to a level last seen in the early 1960s, relative to the size of the economy. In the 1960s, government debt was still falling after reaching over 250% of GDP during World War II.

Public sector net debt, % GDP

10. Where can I find more information?

The Office for Budget Responsibility (OBR) has produced a brief guide to the public finances, which provides a brief introduction to the UK public finances and to the terms used to describe them in the official statistics.

In March 2016, the ONS produced a data driven explanation of the deficit and debt.

Those wishing to delve further into technical areas should look at the Office for National Statistics’ (ONS’) Public Sector Finances methodological guide. The ONS has also produced a public sector finances glossary.

Data on the deficit, debt, spending and receipts are available from the OBR’s public finances databank. Some of the series begin in the 1900s, and the data includes forecasts.

The Library has published the following relevant briefings:

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