U.K. Should Brace for $240 Billion Budget Deficit in Coming Year

(Bloomberg) --

Britain’s budget deficit could easily exceed 200 billion pounds ($240 billion) in the coming fiscal year as the coronavirus crisis hammers the economy and forces the government to unleash a huge package of fiscal stimulus.

The warning came Thursday from the Institute for Fiscal Studies, which said borrowing was on course to top 175 billion pounds -- the equivalent of 8% of GDP -- if the economy “only” shrinks by 5% this year.

That’s more than triple the deficit budget officials forecast just this month. It would leave borrowing, currently 2% of GDP, only slightly below the 10% reached in the aftermath of the financial crisis a decade ago.

“The deficit could easily swell by much more than that if the economy shrinks by more, if takeup of the employment retention scheme is high, or if further substantial fiscal measures are unveiled,” IFS economists Carl Emmerson and Isabel Stockton wrote. “A deficit of over 200 billion pounds in the coming financial year is well within the bounds of possibility.”

The analysis comes a day after emergency legislation rushed into law last night increased the amount available for government departments to spend on contingencies to 266 billion pounds from 10 billion pounds, a sign of the scale of the threat now posed by virus.

Direct Cost

The IFS put the cost of direct government support to combat the economic fallout, including a pledge to pay the wages of workers at risk of losing their jobs, at more than 50 billion pounds in 2020-21. That’s 2.3% of GDP, more than the stimulus deployed during the financial crisis. The remaining hit to the public finances will come from lower tax revenues and higher spending, it said.

While the coronavirus crisis may prove temporary, the effect on the government finances will be lasting, with already high debt levels now set to jump and remain elevated for years to come, the IFS warned.

“The tax and spend trade-offs facing policy makers will be made more stark for years, and more likely for decades, as they strive to bring debt back down over the longer-term,” Emmerson and Stockton wrote.

©2020 Bloomberg L.P.