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Everything You Need To Know About The UK Government Debt

By David Pritchard

The laws on the Trust Registration Service have changed, which has led new legislation to come into effect because of the Covid-19 borrowings. 

 

The government wants to make sure that they’ve got a register of all the trusts in the UK, in order to be certain that those trusts are paying the right amount of taxes. Due to the extra £300 billion that we borrowed as a result of the pandemic, we’ve now got extra sums of money to pay back to the NHS, for example. 

 

However, before Covid-19 even happened, the UK government was already a trillion pounds in debt, and needed to repay £80 billion of that debt this year (which is far more than we spend on anything, other than hospitals). 

 

In this blog, I will explain how UK government debt works. 

 

Gilts and bonds

 

When the UK government needs to borrow money, they are issued “gilts” (we will look at which institution in the UK issues these gilts to the government shortly). A gilt is a fixed-term loan (or bond) at a fixed rate of interest, and a guarantee of the capital back at the end of it.

 

The UK can issue what is called a “tenure index length bond”. It means you would get indexation, which is an adjusted price to combat things like inflation, plus 0.5% or 0.25% of interest. And that would be considered your interest rate for the next ten years. It comes in multiples of £100. So, in the event you put £10,000 into a gilt, you will get your interest returned to you over the following decade. 

 

However, a lot of the gilts aren’t index length, because indexation to inflation is currently at a high point. A lot of gilts are issued at slightly fixed rates. Taking this into account, you can get a 20-year gilt at a 3% rate of interest each year until you make the £10,000 back at the end of that period.

 

Who issues the gilt to the UK government?

 

The short answer is the Bank of England. 

 

Within the government, there’s a department attached to the Bank of England that issues gilts. That means that one of the few saving graces of the £300 billion we borrowed during the pandemic is the fact that, over the last two years, interest rates have been at their lowest since 1694. 

 

Basically, no interest rates were given out by the Bank of England; they used a base rate known as the interbank rate. 

 

Once the Bank of England says interest rates are going to be 1%, they will lend money to the big banks at the said 1%. Those big banks then set their interest rates based on what they need to borrow.

 

From this perspective, our banks make their income through giving people loans where they (the bank) make back a percentage over time. The loan can be for a mortgage or to invest in a small business, for example. Traditionally, that’s how banks have made their profits. 

 

When it comes to how the Bank of England lends, and the UK government receives their gilts, the process works in the same way. 

 

I hope this information was useful to you. If you’re curious to learn more, feel free to email me directly for any further information at david@applewoodindependent.co.uk