Government borrowing

We’ve just had our latest budget here in the UK, with the usual announcements about government borrowing being so many billions of pounds.

What does this actually mean ?

Who does Britain borrow money from ?

I have done a quick google on it but didnt really understand the answers I got.

Western governments are borrowing money all the time. They borrow it from their own citizens, via bonds (fixed-interest loans) of from - domestic as well as foreign - banks, just as any other debitor would (although the sums involved are higher, of course). Banks are happy to lend money to the government because those loans are the safest ones you can get - the government practically can’t go bankrupt. And the government is happy, too, because it prefers takiing up loans instead of cutting expenses or raising taxes.

Actually, the budget debate effectively means that Parliament authorized the government to take up loans of the fixed amount. It doesn’t mean the entire sum is borrowed immediately from one single creditor; it will be done throughout the next fiscal year.

See http://www.straightdope.com/classics/a3_163.html for what Cecil has to say about national debts.

In it’s simplest form, The government sells bonds to investors to raise this cash. Anyone who buys the bonds is loaning money to the government.

So, apart from meaning that the government doesnt have enough money to pay for what it wants, is there another reason for getting money this way in particular ?

Sure.

  1. You don’t have to raise taxes. If you did, the economy would hate that. In fact, there has been a doctrine among economists established by John Maynard Keynes called “deficit spending,” saying that the government should borrow plenty of money - the economy boom will yield enough tax revenues to make this strategy profitable (heavily simplified - I’m not a professional economist, it’s just what I know about modern economies. Others can certainly tell you more and better about this subject, or you can google up more information.)

  2. It’s comfortable for the government, because you don’t have to think about what you could do to get more money. In fact, I’ve always thought that’s the primary reason.

  3. Invesors like it. Lobbies too.

Um…it is good to have a riskless benchmark which the financial markets can use in pricing risky assets. In that sense, having some government debt is a good thing.

I have a problem with the way you seem to characterize government debt. Perhaps the condition of chronic deficits is a bad thing, but gov’t. borrowing per se is not. If the gov’t. sees the need for a new road, then borrowing to pay to have the road now may be a very good investment indeed. Wise investment in public/semi-public goods is one of the things smart governments are supposed to do.

That’s probably cos I dont understand it :confused:

Anything past my own finances (which I’m rather god at I hasten to add) I get somewhat lost.

good at, of course !

That’s a funny typo.

I’m sorry if I came off the wrong way. Just like with your personal finances, some reasons to borrow are good, some bad. So a government investing in something productive that can’t be handled well by the market may be a good thing, such as roads, schools, welfare, etc. That’s all I meant.

Oh, to answer your question, apart from setting a riskless benchmark for capital markets, another reason to borrow is to stimulate demand. If the private sector isn’t spending enough, it may be good for the government to borrow and spend some to stimulate the economy. That’s basically the Keynesian view–or rather an element of the Keynesian view. Keynes’s General Theory is a bit more complicated than that.