With the election slogan “Tax Cut’ Liz Truss won the election to become the new Prime Minister of UK. Her government is cutting taxes instead of raising them, which is expected to cost billions.

UK protestors:

Why does the government have to borrow?

The new government, led by Prime Minister Liz Truss, plans to borrow money to fund a £45bn tax cut.

In addition, the scheme to limit energy bill increases is expected to cost about £60bn over the next six months.

Cutting taxes means the government receives less money. To make up the difference, government borrowing is expected to rise to £190bn this year according to the Institute for Fiscal Studies think tank - and about £100bn a year for the next four years.

The money governments borrow has to be paid back eventually with interest - which is also increasing. This means taxpayers ultimately pay.

Industry estimates suggest the bill could be between £130bn and £150bn, although the Government has yet to publish a total figure.

The total amount the Government borrows is called the national debt, because the money has to be paid back eventually - with interest. This means Taxpayers ultimately pay.

Where does the Government borrow money from?

The Government borrows money by selling bonds. A government bond, better known as ‘gilts’, allows the Government to loan money in exchange for an agreed-upon interest rate. Gilts are mainly bought by financial institutions, such as pension funds, investment funds, banks, and insurance companies, from the UK and abroad.

The larger the national debt, the more interest the Government has to pay on all the bonds it has sold.

This rise in inflation caused interest payments on the nation's debt to reach a new high of £8.2 billion in August.

Debt-interest payments are expected to exceed £100bn, and that’s without accounting for the most recent effort to restrain the rise in energy prices, which is predicted to make things much worse.

According to the latest figures available, the Government is in £2.4 trillion debt, which is almost equal to the annual value of all the goods and services generated in the UK.

The UK national debt is the total amount of money the British government owes to the private sector and other purchasers of UK gilts (e.g. Bank of England). In April 2022, UK public sector net debt was £2,347.7 billion or around 95.7% of GDP).

This is close to the highest level of public sector debt since 1962.

UK mortgage rate hike will hurt borrowers

The UK is a nation of homeowners, with two-thirds of all dwellings belonging to the people who live in them. But as interest rates swiftly rise, there are fears that many of those households will soon find their mortgage payments unaffordable.

There will be many more houses for sale.

​Millions of mortgage borrowers in the UK are bracing themselves for huge hikes to their monthly payments as a consequence of the run on the pound.

Markets have been in turmoil since UK finance minister Kwasi Kwarteng announced the biggest tax cuts in 50 years, together with a big rise in government borrowing, sending the pound falling to a record low against the US dollar.

Some analysts now expect the Bank of England to hike the cost of borrowing to 6% next year, up from 2.25%, to shore up the currency and convince markets that it’s committed to getting inflation under control.

Markets had already been expecting the central bank to raise interest rates to 4.75% by next spring. That would have added £201 ($217) to a typical homeowner’s monthly payment on an outstanding fixed-rate mortgage of £146,000 ($157,000), Laura Suter, head of personal finance at investment firm AJ Bell, told CNN Business. Now borrowers face an even bigger cliff edge.

There are 9 million outstanding residential mortgages in the United Kingdom, according to UK Finance, an association of banks and financial services firms. About 20% of those loans are tracker, or variable rate products, that typically become more expensive when the central bank hikes rates. The rest are fixed-rate loans.

But as many as 1.8 million borrowers will have to refinance next year, according to the Resolution Foundation. Neal Hudson, a housing market analyst at research firm Built Place, estimates that about 300,000 fixed-rate deals will come to an end between October and December. Those borrowers face a sudden increase in their monthly payments should they refinance.

If the base rate rises to 6%, a person refinancing a 20-year fixed-rate mortgage of £146,000 ($157,000) will have to pay an extra £309 ($333) per month, according to Suter. That’s £108 ($116) more than estimated before the pound’s crash.

Many borrowers won’t be able to cope. Samuel Tombs, chief economist at Pantheon Macroeconomics, said in a Tuesday report that a 6% mortgage rate would “lead to a sharp rise in mortgage defaults.”

He calculates that the average household refinancing a 2-year fixed rate mortgage in the first half of next year would see its monthly repayment jump by a whopping 73% to £1,490 ($1,607), an increase equivalent to about 14% of disposable income.

“Mortgage arrears and default would rise just as house prices likely would be tumbling, placing huge strain on banks’ balance sheets,” he said in the report.