19th October 2026
Almost every country owes money, yet governments continue borrowing billions every year. Who is providing the money, why do lenders keep lending, and what would national debt mean for an independent Scotland?.
National debt is one of those subjects that frequently appears in political arguments but is rarely explained in everyday language. Politicians warn that borrowing is too high, promise to reduce the deficit and talk about the burden being left to future generations. Yet governments continue to borrow, sometimes on an enormous scale.
Britain's position illustrates the problem. Public sector net debt reached approximately £2.99 trillion at the end of June 2026, equivalent to 94.9% of the country's annual economic output. Meanwhile, the government spent around £109 billion servicing its debt during the 2025–26 financial year.
These are enormous sums. But who has lent all this money, why do they continue to do so, and does Britain actually need to repay every penny?
Who is lending the money?
The answer may surprise some people. Much of the money governments borrow comes from institutions that ordinary people depend on for their own financial security.
When the UK Government needs to borrow, it usually raises money by issuing government bonds, known as gilts. These are effectively IOUs. An investor lends the government money in return for an agreement to receive interest and, in most cases, repayment of the original sum on a specified date.
The lenders include pension funds, insurance companies, banks, investment funds, overseas investors and individuals.
Pension funds, for example, need investments that can provide relatively predictable income to help meet future pension payments. Government bonds can be useful because their interest payments and repayment dates are generally known in advance.
Insurance companies also hold government bonds to help match their assets against the future claims they must pay. Banks and investment funds buy them for a variety of reasons, including liquidity, risk management and investment returns.
Foreign governments and overseas institutions also buy British gilts. They may want to invest in sterling assets, diversify their investments or hold securities they regard as relatively safe.
There is an important connection here with ordinary savers. A person contributing to a pension may indirectly own government debt through their pension fund, even if they have never bought a government bond themselves.
The Bank of England has also held substantial quantities of government bonds through its quantitative easing programme. It purchased gilts from financial markets to support the economy, although its holdings and the associated financial arrangements have subsequently changed.
Government borrowing is therefore not simply money owed to mysterious foreign creditors. Much of it is money invested by financial institutions, including institutions that manage the savings of the public.
Why do lenders keep lending?
Governments can borrow on a scale that would be impossible for most households because they have the ability to raise taxes, collect revenue and manage public spending over many years.
Britain also has its own currency and a central bank. That gives it more flexibility than a household or a business, although it does not mean borrowing is unlimited or cost-free.
Investors are willing to lend when they believe the government can meet its obligations and when the interest offered represents an acceptable return for the risks involved.
But confidence matters. If investors become concerned about inflation, political instability or the government's ability to manage its finances, they may demand higher interest rates before buying its bonds.
That raises the cost of borrowing for the government and can eventually affect mortgage rates and other borrowing costs across the economy.
A country that borrows in a currency it cannot issue faces additional risks. This is one reason currency arrangements would be particularly important for an independent Scotland.
Is national debt good or bad?
The answer depends partly on what the money is used for.
Borrowing to build infrastructure, improve transport, expand energy capacity or invest in education and research can benefit an economy for decades. If the investment increases productivity and generates additional economic activity, it may help the country manage the debt incurred.
There is a reasonable argument that future generations should contribute towards the cost of long-lasting infrastructure rather than requiring today's taxpayers to pay for everything immediately.
However, borrowing to cover persistent day-to-day spending is more difficult to sustain if there is no credible plan to bring public finances into balance.
Governments sometimes need to borrow more during recessions, wars or emergencies. During the Covid pandemic, for example, borrowing helped fund emergency support when economic activity collapsed. Such borrowing can be justified even though it adds to the debt.
The problem arises when spending consistently exceeds income and the debt grows faster than the economy's capacity to support it.
Interest payments then consume an increasing share of tax revenue. Money that could have funded hospitals, schools, pensions or investment must instead go towards servicing earlier borrowing.
Britain's debt interest bill of around £109 billion in 2025–26 demonstrates the scale of that challenge.
The sensible question is not whether government debt is always bad. It is whether borrowing is affordable, productive and consistent with a sustainable financial position.
Could Britain ever get out of debt?
Technically, yes. But eliminating all government debt is neither necessary nor necessarily desirable.
Governments can reduce debt by running budget surpluses, using the proceeds to repay borrowing, selling assets or benefiting from economic growth that reduces debt relative to national income.
The last point is particularly important. If the economy grows faster than the debt, the debt-to-GDP ratio can fall even when the total amount owed remains substantial.
Imagine a country with debt equal to 100% of its annual economic output. If its economy grows steadily while its borrowing is brought under control, the ratio can fall over time without the government paying off every outstanding bond.
The opposite can also happen. Weak economic growth, high interest rates and persistent deficits can cause the ratio to rise even when ministers announce spending cuts or tax increases.
Britain therefore does not need to eliminate every pound of debt. It needs to ensure that debt is manageable, that borrowing costs do not overwhelm public finances and that investors remain confident the government can meet its commitments.
There is also a practical reason governments continue to issue bonds. Financial markets need a supply of government securities for investment, liquidity and financial management. As older bonds mature, governments commonly issue new ones to refinance some of the money they owe.
This is known as refinancing or rolling over debt. It is normal practice, provided investors remain willing to lend on acceptable terms.
What would national debt mean for an independent Scotland?
This is where the discussion becomes particularly important for Scotland.
At present, the Scottish Government operates within the United Kingdom's financial framework. Most major borrowing for Scotland's public spending is undertaken by the UK Government, while Holyrood has limited borrowing powers, principally for capital investment and managing certain budget pressures.
The Institute for Fiscal Studies has highlighted that Scotland's devolved borrowing limits are much smaller than those available to the UK Government. Scotland has also been preparing to issue its own bonds, which would give it a more direct role in borrowing for devolved purposes.
Independence would change the position fundamentally. Scotland would need to establish a national fiscal framework and decide how to finance its spending, manage its debt and reassure investors that it could meet its obligations.
One of the first questions would be how much of the existing UK national debt an independent Scotland should assume responsibility for.
There is no agreed figure that can simply be transferred to Scotland today. The division of debt would form part of negotiations between the Scottish and UK governments, alongside questions about assets, pensions, financial arrangements and other liabilities.
The existing UK Government's bonds are legal obligations of the UK. The UK would remain responsible to its creditors for those contracts, while any contribution from an independent Scotland would be a matter for the independence settlement.
A population-based share could provide a starting point for discussion, but the eventual arrangement would depend on negotiations. It would be misleading to present a particular figure as an established bill Scotland would automatically inherit.
There is, however, another issue that cannot be avoided. Scotland would need to demonstrate that its tax revenues and economic performance could support its spending commitments and any agreed debt obligations.
The Scottish Government's own financial statistics, including Government Expenditure and Revenue Scotland (GERS), provide a starting point for examining the difference between estimated public spending attributed to Scotland and revenues raised there. But GERS is not an independent Scotland's budget: it describes Scotland's estimated fiscal position within the current UK system.
An independent Scotland would have to make decisions about taxation, public services, pensions, currency and borrowing under a different set of circumstances.
Would Scotland pay more to borrow?
Potentially, at least initially, although the outcome would depend on the arrangements established before independence and the confidence investors had in the new state.
Investors would want answers to several questions. What currency would Scotland use? Would it have its own central bank? What would its tax base look like? How much debt would it assume? Would its government have a credible plan for managing borrowing and inflation?
A country with a clear fiscal framework, credible institutions and a sustainable debt path can attract investors. A country facing uncertainty about its currency, revenues or debt obligations may have to offer higher interest rates.
Even a relatively small increase in borrowing costs can become expensive when a government needs to refinance billions of pounds.
An independent Scotland would not be unable to borrow simply because it was a new state. Many smaller countries borrow successfully. But it would have to establish its own reputation with lenders, and that process could affect the cost of funding public services and investment.
The IFS has previously examined the long-term fiscal pressures an independent Scotland could face, including an ageing population, spending commitments and uncertainty over future revenues. The precise outlook would depend on the economic and policy choices made after independence, but these issues would need to be addressed rather than assumed away.
The real lesson
National debt is neither automatically a sign of government failure nor a free source of money.
It is a way of spreading the cost of public spending and investment over time. Used sensibly, it can help countries build infrastructure, protect their economies during crises and finance projects that deliver long-term benefits. Used carelessly, it can leave governments paying enormous interest bills while struggling to fund essential services.
Britain faces the challenge of stabilising its debt burden while encouraging economic growth. An independent Scotland would face many of the same questions, alongside the additional task of establishing its own financial and monetary arrangements.
The most important measure is not whether a country owes money. It is whether it can service that debt without sacrificing its future prosperity.
The question for Britain, Scotland and every other borrowing nation is not simply, “How much do we owe?” It is, “What did we borrow for, what benefit did it deliver, and can future taxpayers afford the promises we are making today?”