U.K. Government Debt Tops 2 Trillion Pounds for First Time

(Bloomberg) -- U.K. government debt passed 2 trillion pounds ($2.6 trillion) for the first time, a milestone that will stoke the debate over how Chancellor of the Exchequer Rishi Sunak should finance his unprecedented support for the pandemic-ravaged economy.

It means Britain now owes an amount equivalent to more than 100% of economic output, the heaviest burden since the early 1960s, the Office for National Statistics said on Friday.

Sunak said the figures show that difficult decisions are needed to bring the nation’s public finances back to a sustainable footing, in a clear signal he’s not prepared to allow borrowing to accumulate unchecked for too long.

Few are calling for immediate action though. Debt-servicing costs are at record lows and economists have warned that withdrawing fiscal support prematurely could derail the nascent recovery from the deepest slump in living memory.

So far, that recovery is on track. Other figures on Friday showed retail sales rebounding faster than predicted in July and returning to pre-virus levels. Meanwhile, a broad measure of economic activity jumped to the highest in almost seven years in August.

Still, the debt figures reflect a hit to tax revenues after the lockdown imposed in March plunged the economy into a record recession, as well as the vast cost of government spending programs deployed to keep businesses and jobs afloat.

Even as the burden mounts, Sunak is facing calls to increase aid by extending his flagship furlough program, which is scheduled to wind down at the end of October. The program has helped protect almost 10 million jobs, and economists are warning unemployment will spike if the support is removed.

The program cost 7.5 billion pounds in cash terms in July, helping push the headline budget deficit to 26.7 billion pounds. That took borrowing in the first four months of the fiscal year to more than 150 billion pounds -- close to the shortfall of 158 billion pounds recorded in the full year following the global financial crisis.

While Sunak has ruled out a return to the austerity that his predecessor George Osborne pursued in the aftermath of that crash, he insists government finances will need to be restored to health.

“Today’s figures are a stark reminder that we must return our public finances to a sustainable footing over time, which will require taking difficult decisions,” the chancellor said on Friday.

Members of the Conservative Party largely accept the ramp up in debt as a necessity to deal with the pandemic, but there are some rumblings of disquiet. Steve Baker, a Conservative former minister who sits on the House of Commons Treasury Committee, described the data as exposing the “road to ruin” of the coronavirus.

“Ministers must change course boldly, fast to maximize growth by liberalizing taxes, liberalizing regulations and liberalizing trade policy,” he said by text message on Friday. “Or they must describe how grinding miserably on with money creation outpacing borrowing can possibly lead to prosperity.”

More Borrowing

For now, the bond market is putting little pressure on Sunak. Gilts were little changed after the report and yields have fallen close to record lows since the Bank of England slashed interest rates and injected billions of pounds into the financial system. Economists expect the central bank to loosen policy further later this year to support the fragile recovery.

More borrowing is on the way. The Debt Management Office plans to raise an additional 110 billion pounds between September and November, bringing total sale plans from the start of the fiscal year to 385 billion pounds.

Other key figures from Friday’s release include:

• The central government net cash requirement, the basis for bond issuance, climbed to almost 200 billion pounds in the four months through July, the most for the period since records began in 1984
• In July alone spending rose almost 23% from a year earlier, while government receipts fell about 17%.

Britain is facing a deficit of over 16% of GDP in the current fiscal year, the highest in peacetime history. The pandemic hit the nation harder than most, with worst second-quarter performance among major European economies, reflecting the fact that the lockdown went on for longer.

Budget deficits are escalating across developed nations though. Italy, France and the U.S. all forecast to have bigger debt-to-GDP ratios this year than the U.K.

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