Metis AM
Each year, the government funds a range of important public services as well as projects that benefit the economy.
Ordinarily, the government uses the income it receives from taxes to cover the cost of providing these services. But sometimes there is a shortfall, and this is where government borrowing comes in.
Borrowing can help make up the difference between the income received from taxes and the cost of providing public services. In July, government borrowing was higher than anticipated and this led some economists to speculate on tax changes that the government might make in its first Budget.
Read on to learn more about what happened, why the government borrowed more than expected in July, and what it could mean for your finances.
Borrowing is a method the government can use to fund public services
The government has a few ways to ensure it covers the cost of public services:
- Raising taxes
- Cutting spending
- Borrowing by selling government bonds.
Sometimes, it is possible to cover the cost of public services from taxes alone, but often the government needs to borrow money to top up what it receives in taxes.
Raising taxes can create other economic challenges. When taxes are higher, consumers have less spending power so they tend to buy less, reducing the profits that companies make. When companies make less profit, they pay less tax, which can create more problems for the government.
So, sometimes borrowing is a more economical option than raising taxes. The government does this by selling bonds. Bonds are financial products that will pay out a certain amount of money at a specified time in the future. You usually need to pay regular interest on a bond that you own until you receive your payout.
UK government bonds are also known as “gilts”. They’re commonly purchased by pension funds because they are considered a “safe” investment. Being government-backed means there is little risk that the product won’t pay out – it would take the entire government to collapse for this to happen.
The government borrowed more than anticipated in July to cover the rising cost of providing public services
In July, the cost of providing public services and inflation-linked benefits rose, so the government needed to borrow more than economists had expected. The BBC reports that borrowing hit £3.1 billion, which was the highest level for July since 2021. The rise in government borrowing was £1.1 billion higher than economists had predicted.
The report suggests that additional borrowing was needed, in part, because of the impact of the National Insurance cuts that the previous government made earlier this year.
Sky News reports that data shared in August shows that the economy is performing well. Unemployment rates are low, inflation has fallen back to a more manageable level, and Gross Domestic Product is growing.
Despite this, the level of government borrowing we saw in July means that new chancellor Rachel Reeves may need to make cuts to public spending and raise taxes. It’s important to note, though, that the government has already promised not to raise VAT, Income Tax, or National Insurance.
Government borrowing can have both negative and positive effects on your finances
Government borrowing isn’t necessarily a bad thing for your finances, but it’s not easy to know for sure the impact it will have.
On the one hand, borrowing can help the government to invest in public services and infrastructure. Consequently, it can create jobs and encourage more people to spend, which often leads to economic growth. Economic growth can increase confidence, which may help to boost stock market returns.
On the other hand, it may lead to higher interest rates because it pushes the cost of borrowing up. This can affect you if you have a variable-rate mortgage as your interest rate might increase. Higher interest rates can also have a negative effect on stock markets as it can create uncertainty, leading to volatility.
Your financial planner can advise you of the most sensible way to protect your wealth from the impact of economic uncertainty.
Get in touch
Our team of financial planners is here to support you in managing your wealth and achieving your long-term financial goals.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
