U.K. Battles Coronavirus Crisis on Sound Fiscal Footing

(Bloomberg) --

Britain is fighting the coronavirus from a position of fiscal strength, with new figures showing the budget deficit under firm control prior to the crisis.

Spending and revenue were in virtual balance in February, leaving borrowing in the first 11 months of the fiscal year at 44 billion pounds ($52 billion), the Office for National Statistics said Friday.

It means the deficit is on course to come in around 2% of GDP in 2019-20 as a whole, compared with 10% in the aftermath of the financial crisis a decade ago.

The figures come as Chancellor of the Exchequer Rishi Sunak prepares later today to announce a package of wage subsidies to keep people in work and stop companies going bust because of the fallout from the virus pandemic.

The pledge is set to come on top of 12 billion pounds of relief announced in the budget and 350 billion pounds of loan guarantees, tax cuts and grants unveiled earlier this week.

The precise effect on the public finances is unclear. But with Britain now heading for a possible recession, borrowing is almost certain to be significantly higher than the Office for Budget Responsibility forecast just this month.

Capital Economics calculated the “double whammy” of emergency support and the hit to revenue from falling output could conceivably push the deficit back to its post-crisis levels in the coming fiscal year.

However, it expects gilt yields to remain low, thanks to monetary easing by the Bank of England and “manageable” levels of government debt. Net debt remained below 80% of GDP last month, lower than in other virus-afflicted European countries such as Italy, Spain and France.

Official Forecast

The OBR projections, which were compiled before it became clear how quickly the virus would spread, saw the deficit rising gently as the government increased investment to help “left-behind” regions of the U.K., but remaining below 3% of economic output.

The latest figures show the budget deficit in February was just 331 million pounds, the smallest for the month since 2017. Revenue grew 3% from a year earlier and spending including capital investment rose 1%. Cumulative borrowing was up 10% on a year earlier as the government eased a decade of austerity.

Strong departmental spending last month was partially offset by a fall in debt-interest costs.

©2020 Bloomberg L.P.