Government Debt
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The financial markets are not simply a place for businesses to raise capital for investment projects. The financial markets also provide a medium for national governments to raise capital. We shall now briefly discuss government debt in the UK.

The UK government uses the financial markets to raise capital, to finance its operating costs. The use of the financial markets became commonly used during and after the second world war to fund both the war effort and post war reconstruction. The most common method by which capital is raised is through gilts.

The most common form of gilt is the indexed linked gilt, this offers a rate of return above the prevailing inflation rate of inflation to guarantee a positive return on investment. This type of gilt is generally based on the Retail Price Index (RPI) so a change in the underlying rate of inflation will be incorporated in the return on investment.

Gilts are usually issued by the Bank of England to 'Money Makers' this is known as the primary market. The 'Money Makers' then offer the gilts to be traded to the general public which is known as the secondary market.

Gilts are usually issued in two ways, the first is by tender offer for a big issue or in smaller chunks/tranchettes.  Both these gilt issues would be offered to the primary market first, but the tranchettes can be put straight to the secondary market.

IF THE UK GOVERNMENT HAS A BUDGET SURPLUS IT SHOULD BE ABLE TO REDUCE ITS BORROWINGS AND THEREBY REDUCE THE AMOUNT OF GILTS ISSUED. HOWEVER IF THE GOVERNMENT OPERATES IN EXCESS OF ITS BUDGET THEN IT WILL NEED TO INCREASE ITS BORROWINGS TO FINANCE THE DEFICIT.

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