As well using taxes, another way that the Government can get money is to borrow it. Although this is often discussed as though it is a terrible thing to happen, it can actually be a good idea.
The way that the Government borrows money is by selling bonds. A government bond is essentially a certificate saying that the Government owes you money. Anyone who has enough money can buy one.
Every government bond has a date at which it ‘matures’. For example, you could buy a bond which matures in two years. When this date is reached, the Government pays you back the amount that you spent on the bond plus interest.
You can see that although it is described as buying a bond from the Government, all you are really doing is lending them money. The loan lasts for a fixed amount of time, after which the Government pays you back with interest.
Buying government bonds is considered to be a very safe way to invest your money (compared to, for example, investing in the stock market). It is a very common way for people to invest their savings. Pension funds often invest their members’ money by buying government bonds, since it is so low-risk.
High levels of government borrowing have been criticised as “living beyond our means”. This phrase brings to mind someone who spends lots of money on a credit card with no plan for how they are going to pay it back. Of course, this would be a reckless and foolish thing to do, and that person would end up with debts spiralling out of control.
However, if we think about other examples of borrowing money in everyday life, we can see that it can often be a wise financial decision.
For example, a homeowner might take out a loan in order to insulate their house – something that they couldn’t afford to do without borrowing money. Although they will have to pay interest on the loan, the money they will save on heating means that within a few years they will be financially better off. Also, the improvements will have increased the value of their home. Borrowing money essentially allows them to unlock savings that more than pay for the cost of the loan.
Many businesses start out by taking out a loan, and in fact it may take a few years of trading before the loan and the interest are fully paid off. However, the loan allows them to start a business that they wouldn’t have been able to start otherwise, and if they are successful then the profits end up making the cost of the loan worth it.
Another example is a mortgage. Most people who buy a house do so by taking out a mortgage, which is a loan from a bank or building society to help them pay for their new property. Although they have to pay the loan back with interest, the money that they save on rent, plus the fact that they now own a house, leaves them better off over all.
As we can see then, borrowing money can be a good idea if you use the money to invest in things that will allow you to make more money in savings or profits than you pay in interest.
Borrowing money through bonds enables the Government to spend more money. There are many ways in which this spending can be an investment that leaves the Government financially better-off in the long run.
For example, by spending more money on education, the Government can ensure that people in the country are given the knowledge and skills they need to start their own businesses or to access better-paid jobs. Businesses will be more productive because their workers have had better training, and this will allow them to compete with businesses in other countries.
Overall, people’s incomes will be higher, companies will have higher profits, and people and companies will be spending more money. All of these factors mean that the Government will get more money through tax (income tax, National Insurance, corporation tax, VAT and other taxes).
Another example is healthcare. Since 2010 the Government have massively reduced spending on healthcare. Hospitals and clinics are overstretched. Wait times have gone way up. Doctors, nurses, paramedics and other NHS staff are exhausted from working long shifts. Many clinics have shut down, meaning that people can’t access services locally. All of these factors mean that the quality of healthcare people are receiving has gotten worse and they are having to wait longer for treatment which means that their conditions worsen and more complications develop.
If the Government spent more money on healthcare, the NHS could provide better treatment more quickly. This would save money in the long-run as earlier intervention and better treatment would mean that people would need fewer visits to hospital and less medication. Also, sickness makes people unable to work. So spending more on healthcare would actually boost the economy as people would have fewer sick days, meaning that business profits would increase and the government would get more money from taxes.
Similar arguments apply to all different kinds of government spending. Investing more money in transport would make it easier for people to get to work and for businesses to transport goods, which would boost the economy and lead to more tax revenues. Spending more money on rehabilitation services and skills-training for prisoners would make them less likely to end up back in prison once they leave and more likely to find work. This would mean the Government would have to spend less money imprisoning people and would get more money from taxes.
When the Government spends money, that money does not just disappear. Instead it goes into the bank accounts of the people and businesses that the Government pays. These people and businesses will then spend the money on the things that they need and want, meaning that the money is transferred to the other people and businesses that they buy things from. This process continues, with the money circulating between people and businesses.
As we have seen, the Government borrows money by selling bonds. People who buy bonds are using their savings – money that might otherwise be sitting in a savings account. One of the other main ways that the Government raises money is through income tax. This mostly comes from wealthy people, who already have enough income to pay for all of the things they need and want, meaning that if the money was not being taken through tax it might just be sitting there.
By taxing wealthy people and borrowing money from them, the Government is able to take money that is sitting there doing nothing and make it circulate around the economy. The people and businesses who are paid by the Government have more money to spend, so more government spending leads to more spending by individuals and businesses, which then leads to more spending by the people and businesses that they buy things from, and so on.
As we can see, government spending can actually lead to growth of the economy (which, of course, will mean that the Government gets more money from taxes in the future). In fact, many economists recommend that when economic growth is poor, like in the UK after the economic crash of 2008, governments should spend more money to give the economy a boost. However, the Conservative governments we have had since 2010 have decided to do the complete opposite, massively reducing government spending. This has held back economic growth, driven people into poverty and put a massive strain on the NHS, schools, emergency services and other public services.
The Conservative Party told us that this policy of cutting government spending (which is called austerity) was necessary. They told us that the misery, the deaths, the children going to school hungry, the homelessness and the job losses were all unavoidable because it was vital that we reduce government borrowing. The reality is that these devastating cuts have actually slowed down our economy’s recovery from the economic crash.
I said above that borrowing money can be a good idea if what you do with it ends up making you or saving you more money that you have to pay in interest. However, if there was a way for you to get the same amount of money and not have to pay any interest and not even have to pay the money back, then that would be even better.
The Government does have ways that it can get more money without having to pay it back or pay interest on it. One of these ways is through taxes. If the Government raised more money through taxes, for example by increasing the top rate of income tax, increasing corporate tax, and cracking down on tax evasion, then they wouldn’t have to borrow as much money.
Borrowing money can be a good idea because it can end up raising more money for the Government that in costs them in interest. However, taxation is an even better idea because they don’t have to pay any interest and they don’t have to pay the money back.
So I am not trying to say that the Government should be borrowing more money. I think it would be better to increase taxes and use that money to increase government spending. In fact, if the Government raised enough money through taxes they could both increase government spending and reduce government borrowing at the same time. This would be a good idea because it would leave the Government in less debt.
However, the important point is that government borrowing is not the disaster that the Conservative party have made it out to be. When economic growth is slow, the best thing to do is increase government spending. Government borrowing is not a bad way of doing that, it’s just that taxation is an even better way.
In fact, the only reason that Government debt is a bad thing is that paying the interest on it leaves us with less money to spend on public services. So to try to solve that problem by spending less on public services makes no sense.
I think you should vote for Labour on Thursday the 12th of December because they are against austerity. They want to increase government spending and invest in healthcare, education, welfare, green energy and all the other vital public services that the Conservatives have cut funding for.