When the public reads headlines like:
“Government ‘hits the deficit target and borrowing is at its lowest since 2002”
“Chancellor ‘unveils lower borrowing forecasts as slightly stronger growth and higher tax receipts boost the public finances”
or “UK’s debt has increased by £555 billion”
they are either impressed that the government is meeting its spending targets or horrified at its wastefulness. The belief that the government’s budget works in the same way as a household budget is ingrained in the public consciousness. Just as people believe that a government’s spending is limited by the amount of tax it collects there is a common acceptance of the notion that the UK government has to borrow money from the private sector to cover its deficit.
However, government “borrowing” is not really borrowing. The government, as the currency issuer, pays its bills by simply crediting bank accounts via entries on a computer screen. It does not need to borrow the currency that it has already issued.
In the UK, government offers savings accounts, known as gilts (in the US they are Treasury Bonds) and these can only be purchased with government currency. So, in order to purchase a gilt the buyer must already have the currency in his/her bank account. The bottom line is that the government has to spend its currency into the economy before anyone can buy a gilt.
For more information on gilts and bonds, see our fact sheet here.