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This year, public services and investments will cost the UK government more than £1 trillion. This includes salaries for nurses, school supplies, and state pensions.
In the last 50 years, taxes have only paid for the government’s spending six times.
Most of the time, the UK economy has a shortfall of about 3% of the money it makes yearly.
However, this is not the infamous “black hole,” which is a future amount that depends on what the government wants to do.
Where does the UK government lose money?
Bonds, IOUs, are a way for the government to borrow money from the financial markets. This gives the government enough money to pay for its spending. But if it wants to borrow money at rates that aren’t too high, it must show investors reasons to do so.
So, the markets expect governments to make and follow the rules about how much to borrow. And how that debt should be handled to show that they are good with money.
When the Autumn Statement is given on Thursday, we will know the exact goal of the government. Even though it will reduce the size of the debt about national income in the medium term.
The “black hole” is the extra money the government needs to find in the future to meet its goals.
The hole is how big?
Support packages for Covid caused the government to borrow more than it had since the end of the second World War. Concerns about debt have also been raised by the cost of help with energy bills and tax cuts.
Much depends on how the economy does, but the independent Institute for Fiscal Studies (IFS) estimated that, after September’s mini-budget that cut taxes. It may need over £60bn by 2027 to keep the size of the debt stable concerning national income.
The government has rolled back most of the tax cuts made in September. But some economists still say that the government may need tens of billions of pounds by 2027 to meet this goal. The number is hard to predict because it will depend on the measures in the Autumn Statement and the Office for Budget Responsibility, an independent watchdog for the government.
Does the hole worry the government?
Investors worry that the UK would have to borrow more than they were comfortable with because of the tax cuts. They also worried that inflation would go up because of the tax cuts. Because of these risks, bond investors wanted a higher return, so the interest rate, or yield, on these bonds shot up. This could add billions to the cost of the government borrowing money in the future.
Higher interest rates and inflation are already driving the government’s loan interest. So we were already spending twice as much on debt interest as on defense.
After a flood of tax U-turns, the yields on government bonds went down. But the lesson is clear: if you want to get money from the financial markets, you can’t ignore a “black hole.”
When the government ran up big bills to help the economy through Covid, the market didn’t react the same way. This is because the government had a willing buyer for its extra debt. At the time, the Bank of England was helping the economy through “quantitative easing,” which meant buying many bonds. But that was a quick way to help, and they took it away.
Why can’t a government print money pay for its plans? It might seem like a good idea, but in a time of fast inflation, it could just make prices go up.