The budget deficit: a short guide

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 the financial year 2021/22, government revenue – from taxes and other receipts – was £915 billion while government spending was £1,040 billion (£1.0 trillion). The deficit was therefore £125 billion, equivalent to 5.4% of GDP.

At 5.4% of GDP, the deficit was the UK’s twelfth largest since 1948. During 2021/22, the Government was supporting households, businesses and public services through the coronavirus pandemic. Less support was provided than during the previous year when, as discussed below, the deficit reached a peacetime record of 15% of GDP.

Borrowing of £125 billion is equivalent to around £1,870 per head of the UK’s population.

2. How much did the budget deficit increase during the pandemic?

The deficit reached a peacetime record in 2020/21 of 15% of GDP, largely for two reasons:

1. the Government provided 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 39.5% of GDP in 2019/20 to 53.0% in 2020/21. The large increase reflects both government spending increasing in cash terms by around 24% and GDP falling by around 7%, in 2020/21.

While government revenues fell in cash terms, they became larger relative to the size of the economy. This was because GDP shrank more than revenues did. Government revenues were equivalent to 36.7% of GDP in 2019/20 and 38.0% of GDP in 2020/21.

The Government continued to support public services, households and businesses during 2021/22, but to a lesser extent than in the previous year. Government’s pandemic-related support cost around £78 billion in 2021/22, compared with £229 billion in 2020/21.

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 government to borrow. Since 1970/71, the government has had a surplus (spent less than it received in revenues) in only five years. The last budget surplus was in 2000/01.

Since 1970/71, the average annual budget deficit is 3.7% 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.

Relatively large budget deficits are forecast for 2022/23 and 2023/24 as the UK faces high inflation, rising interest rates and a weak economy. The Government is spending a lot supporting households and businesses with high energy prices and other cost of living pressures. Meanwhile, government spending on debt interest is growing. The Library briefing Rising cost of living in the UK discusses the government support being provided.

The deficit is forecast to fall to a more typical level in the years after 2023/24, on the back of a recovering economy and net tax rises and spending cuts announced since March 2021.

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

Governments across the world borrowed more due to the coronavirus pandemic. The International Monetary Fund (IMF) estimate that across advanced economies borrowing averaged 7.2% of GDP in 2021. For the G7 group of advanced economies borrowing averaged 8.7% of GDP.  

The IMF report UK government borrowing of 8.0% of GDP in 2021. Amongst the G7 countries, relative to the size of their economies, only the US borrowed more than the UK. The IMF’s data for the UK may differ from figures reported by UK organisations – such as the ONS – but the IMF’s data are good for making international comparisons.

5. How is the budget deficit funded?

The budget deficit is financed by the 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 so-called secondary markets. The Library Insight Coronavirus: Government debt, an explainer explains this further.

The Government 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 risen since.

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. The Library briefing paper Coronavirus: Economic impact discusses this further.

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

Interest payments on government’s past borrowing are a relatively big cost for government. Spending on debt interest accounted for around 5% of government spending since 1990/91. In 2021/22, government’s gross debt interest spending was £73 billion; net debt interest spending was £57 billion. The net figure accounts for savings made due to the Bank of England holding some government debt.

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 has, up until recently, faced a lower effective interest rate on the debt held by the Bank of England.

Net debt interest spending in 2022/23 will be higher than in recent years. This is largely because the interest paid on around one quarter of the Government’s debt is linked to inflation, which has accelerated during 2022/23. Interest rates have also risen.

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. Unlike the overall budget deficit, the current budget deficit doesn’t include investment spending and therefore is said to measure the degree to which taxpayers meet the cost of paying for the services provided to them.

The current budget deficit was £76 billion in 2021/22, equivalent to 3.3% of 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 work-related welfare 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. However, the structural deficit cannot be directly measured so it must be estimated, which is difficult to do and open to interpretation.

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 2021/22 public sector net debt was £2,373 billion (i.e. £2.4 trillion), or 97% of GDP. This is equivalent to around £35,000 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. 

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 1900/01, and the data includes the latest forecasts.

The Library has published the following relevant briefings:

• Public finances
• Coronavirus: Government debt, an explainer
• Coronavirus: Economic impact
• Government borrowing: Peacetime record confirmed