U.K. Budget Deficit Swells to Record on Coronavirus Stimulus
The U.K. government borrowed over twice as much last quarter than it did in the whole of the previous fiscal year, amid the towering cost of supporting the economy through the coronavirus crisis.
The budget deficit stood at 35.5 billion pounds ($45 billion) in June, taking borrowing in the first three months of the fiscal year to a record 127.9 billion pounds, the Office for National Statistics said Tuesday. Debt climbed to 99.6% of GDP -- the highest since 1961.
Chancellor of the Exchequer Rishi Sunak has committed more than 190 billion pounds of government spending and tax cuts in an effort to save jobs and keep businesses afloat. Combined with the damage inflicted by the worst recession for at least a century, that means a deficit that was forecast to be just 55 billion pounds this year is now on course to exceed 370 billion pounds, according to the Office for Budget Responsibility.
The pound was at $1.2689 following the report, up 0.2% on the day. Ten-year gilt yields were at 0.15%, close to a record low.
At around 19% of GDP, the deficit projected for 2020-21 would be the highest since World War II and almost double the levels reached after the financial crisis a decade ago. And it’s not the most pessimistic scenario outlined by the fiscal watchdog last week.
Government debt could take decades to bring down to more sustainable levels, economists say. But while the stock of debt is high, the cost of servicing it is more affordable than ever, thanks in part to massive Bank of England bond buying in the secondary market which has pushed down gilt yields. Tax rises nonetheless appear inevitable once the crisis has passed, with Sunak repeatedly saying the public finances need to be repaired in the medium term.
“In time the chancellor will face the tough political challenge of putting the public finances back on a sustainable footing,” said Charlie McCurdy, an economist at the Resolution Foundation think tank. “But the time for the tax rises that will require is when a recovery has been secured.”
The latest snapshot of the public finances showed government revenue fell 13% between April and June compared with a year earlier, with receipts down across the board. Spending meanwhile jumped over 40%, driven by a 70% increase in departmental outlays.
The deficit last month was nevertheless lower than in April and May, reflecting reduced government support as the economy gradually reopens following months of lockdown.
The ONS cautioned, however, that borrowing estimates remain subject to greater than usual uncertainty, with May seeing downward revisions to both the deficit and debt.
A cash measure that determines government bond issuance showed a deficit of 47.1 billion pounds in June, taking the total for the fiscal first quarter to 174 billion pounds. The Debt Management Office is on course to sell around half a trillion pounds of gilts for the year as a whole.
©2020 Bloomberg L.P.