U.K. Can Afford to Splash the Cash to Restore Economic Growth

(Bloomberg) -- The U.K. can ramp up spending to fight the coronavirus pandemic without risking unsustainable levels of debt, thanks to historically low interest rates.

A study for the Institute for Public Policy Research found that even a doubling of the U.K.’s debt would still leave the Treasury paying less to service its debt, as a share of tax receipts, than at almost any time since 1950.

The findings are likely to fuel pressure on Boris Johnson’s government to tackle the fiscal damage left by the crisis by boosting economic growth rather than returning to the era of austerity, which many economists say would hamper the recovery.

“The government should do what it takes to kickstart the economy and not jump to debt-reduction mode,” said Senior Economist Carsten Jung.

The IPPR study concluded a three-month lockdown could see debt reach 120% of gross domestic product -- the highest since the 1950s -- or 130% if the shutdown lasts for six months.

The projections are higher than those made by the Office for Budget Responsibility, but the IPPR said cheap borrowing costs mean the debt burden would stabilize. Official forecasts for a rapid economic recovery next year are overly optimistic and more spending, rather than budget cuts, will be needed to fuel a recovery, according to the think tank.

Bond investors remain sanguine, despite warnings that the cost of government support programs and the hit to tax receipts from the lockdown could cause the budget deficit to soar to a post-war high of 15% of GDP in the current fiscal year. Ten-year gilt yields are currently around 0.26%.

In a separate report, the Resolution Foundation said that the Britain is experiencing an uneven living standards crisis, with young and older workers most likely to have lost work or had their earnings reduced. The U.K. Is due to announce its latest unemployment data later Tuesday.

©2020 Bloomberg L.P.

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