U.K. Borrowing Set to Pass $360 Billion Amid Virus Blow

(Bloomberg) -- U.K. government borrowing looks on course to exceed 300 billion pounds ($366 billion) in the current fiscal year, according to the latest forecasts from the nation’s fiscal watchdog.

The Office for Budget Responsibility said the budget deficit for 2020-21 could total 298.4 billion pounds, a post-war high of 15.2% of GDP. That’s an increase from the 273 billion pounds projected a month ago. It includes an estimate for the direct effect of government spending and tax decisions to support the economy of 123.2 billion pounds.

The deficit is all but certain to be higher, however. The OBR put the gross cost of the newly extended Job Retention Scheme, which pays the wages of furloughed workers, at 69 billion pounds through the end of July, but said it was too early to estimate the impact of a more flexible furlough program that is due to run between August and October.

The figures will fuel the debate over how Britain handles the inevitably large debt load once the crisis is over, with the OBR predicting net debt could reach almost 96% of GDP this year -- the most since the early 1960s.

This week, the Telegraph newspaper reported a leaked Treasury assessment about the cost of the crisis to the government. The “base case” saw the deficit, forecast at 55 billion pounds before the pandemic, rise to 337 billion pounds. The “worst case” scenario saw it hit 516 billion pounds. A Treasury spokesman declined to comment, dismissing the story as “speculation.”

Policy Bind

Still, the options laid out demonstrate the bind that Chancellor of the Exchequer Rishi Sunak is in. The austerity after the financial crisis has left public services stretched with little room for further savings, while imposing cuts on frontline workers who have led the response to the pandemic will be politically difficult.

Some have called for higher taxes in the wake of the crisis, but critics warn that could choke off growth at a crucial moment in the recovery.

That may leave politicians having to accept higher debt for years to come in the hope the burden can by reduced by a combination of economic growth and inflation, a break with economic orthodoxy that prevailed in the U.K. until recently.

At around 6% of GDP, the U.K. response is nonetheless relatively small, according to the Institute of Fiscal Studies, which cited International Monetary Fund estimates that put the average in other G-7 countries at over 9%.

The benefit system offers little support for people without children who become unemployed, meaning the U.K. “would, if anything, need a larger bespoke package than those countries to guarantee a similar level of income support to all types of workers,” said Isabel Stockton, a research economist at the IFS.

Cheap Rates

While the cost of the pandemic measures are eye-watering, the government is currently able to borrow at historically low rates, helping to ease the burden of debt servicing. That’s largely down to the Bank of England asset purchases, which economists expect to be expanded as soon as next month.

The bond market is taking the massive increases in spending in its stride, with the yield on 10-year securities currently at 0.2%, even lower than they were when Sunak announced the extension to the furloughing plan on Tuesday.

The furlough program would cost 21 billion pounds between August and October even if the costs fall by a half, taking the total to 84 billion pounds, according to the OBR.

The OBR estimates are based on the lockdown to stop the spread of the coronavirus lasting for three months, with some curbs continuing thereafter. It left other key projections unchanged, seeing the economy contracting 35% this quarter and unemployment reaching 10%.

©2020 Bloomberg L.P.