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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 £793 billion while government spending was £1,093 billion (£1.1 trillion). The deficit was therefore £303 billion, equivalent to 14.3% of GDP, which is a peacetime record. As we discuss below, the budget deficit ballooned because of the coronavirus pandemic.

Borrowing financed around 27%, or around £1 in every £3.60, of public spending in 2020/21. Borrowing of £303 billion is equivalent to around £4,500 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:

  • the Government spent hundreds of billions supporting public services, households and businesses during the pandemic;
  • the virus and the lockdowns aimed at slowing its spread took the economy into a severe recession. Less economic activity has meant less tax receipts and more government spending on areas such as unemployment benefits.

Government spending increased from 39.8% of GDP in 2019/20 to 52.2% 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 37.3% of GDP in 2019/20 and 37.8% of GDP in 2020/21.

Public sector spending and revenues, % GDP

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.

The average annual budget deficit has been 3.6% of GDP since 1970.  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

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) forecast that across advanced economies borrowing will average 11.7% of GDP in 2020. For the G7 group of advanced economies borrowing of 13.1% of GDP is forecast. 

The IMF report UK government borrowing of 13.4% of GDP in 2020. Amongst the G7 countries, only the US is forecast to borrow more than the UK, relative to the size of their economies. 

International comparisons of borrowing

5. How is the budget deficit financed?

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. Further information is available in the Library Insight Coronavirus: Government debt, an explainer.

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 have continued to do so.

The Bank of England has been buying large quantities of government bonds from investors on the secondary market. The Bank has been doing this to support the economy during the coronavirus pandemic, through its quantitative easing programme. The purchases have 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 £22 billion.

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. Government bonds held by the Bank are effectively refinanced at Bank Rate, which is usually a lower rate of interest.

Central government debt interest, % of GDP

Government’s debt interest payments are at historically low levels. The Office for Budget Responsibility (OBR) forecast that they will remain so despite the increase in debt arising from the pandemic. The OBR expect: interest rates on new borrowing to remain low; relatively low inflation (some interest on government bonds is linked to inflation); and the government to continue to benefit from the Bank of England holding around 30% of government bonds.

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 £247 billion in 2020/21, equivalent to 11.8% 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. How much did the financial crisis contribute to the budget deficit?

This is not a straightforward question.  Government support for the banks took a variety of different forms, including share purchases, loans and guarantees which have different effects on the public finances.  Guarantees, for example, are more likely to give rise to contingent liabilities which will only materialise under certain circumstances.  This is quite different from purchases of bank shares where there is an outlay of cash. 

While the overall level of support for the banks was very large, the impact on the deficit was comparatively small. The Government has said that the financial crisis accounted for around 5%-6% of the deficit in 2008 and 2009.

10. 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 £2,138 billion (i.e. £2.1 trillion), or 97% 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

11. 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 are pointed towards the Office for National Statistics’ (ONS’) Public Sector Finances Methodology Guide. The ONS have also produced a public sector finance glossary.

Data on the deficit, debt, expenditure and receipts are available from the OBR’s public finances databank. Some of the series begin in the 1920s, and the data includes forecasts.

The Library has published the following relevant briefings:

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