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UK government borrowing and debt surge

The UK’s public finances lurched into the red in April as the coronavirus crisis deepened, leading to a record increase in the government’s borrowing and a rise in the ratio of its debt to national income to the highest level in 57 years.

With economic activity likely to have dropped about 30 per cent and ministers removing controls on public spending, the emerging official figures suggest the hit to the nation’s finances was worse than the Office for Budget Responsibility, the fiscal watchdog, expected.

Although it is early days in the crisis, the figures will reinforce ministers’ desire to address the pandemic so they can restart much of the economy and begin to repair a huge hole in the government’s books.

There was a dramatic deterioration across all measures of the public finances, even where the figures are less certain than usual because some elements are based on highly uncertain forecasts.

Given these uncertainties, the Office for National Statistics recommended looking more closely than normal at cash flowing into and out of government accounts, which can be measured better in real time.

The central government net cash requirement — the amount Whitehall was in the red in cash terms — jumped to £63.5bn in April alone, a £73.3bn deterioration from a surplus of £9.8bn in April 2019. This was the largest single-month deterioration in the measure since records began in 1984.

Line chart of Public sector net debt as a % of GDP showing Public sector net debt jumps to its highest level since 1963

A wider measure of the cash position of the whole public sector — the public sector net cash requirement — also jumped, to £88bn in April, compared with the OBR’s estimate of £68bn in the same month.

With such a large increase in borrowing measures, public sector net debt surged by £118.4bn to stand at £1.9tn, very close to the size of the whole economy.

The ONS said that public debt as a share of national income jumped 17.4 percentage points in the past year to stand at 97.7 per cent, the highest burden of debt in the UK since 1963-64. At that time the debt burden was steadily falling from a peak after the second world war.

Line chart of Central govt net cash requirement (£m) showing More borrowing in April than in any month of the finanical crisis

Samuel Tombs, UK economist at consultancy Pantheon Macroeconomics, said the deterioration of the public finances would require a huge issuance of gilts and the Bank of England would need to mop these up with an extension of quantitative easing at its meeting in June for the government bond market to remain orderly.

“Such [BoE] purchases would keep the stock of gilts in private-sector hands unchanged this year and thus maintain record-low borrowing costs for the government,” he said.

Yields on shorter-dated UK government bonds dropped further below zero on Friday, meaning buyers are willing to accept a nominal loss if they hold the debt to maturity.

The yield on the five-year gilt fell below zero, by 0.017 percentage points to -0.017 per cent, while the benchmark 10-year gilt declined by the same margin but was still above zero at 0.156 per cent. Yields move in the opposite direction to bond prices.

The rally in UK sovereign debt has been driven by expectations of further interest rate cuts from the Bank of England. 

The deterioration in the public finances came partly from a plunge in tax revenues in April over and above policy measures such as the government’s scheme to allow companies to defer value added tax payments.

Income tax receipts through the pay-as-you-earn system were down 28 per cent in April compared with the same month a year earlier, with national insurance contributions down 25 per cent and corporation tax payments also notably weak.

After analysing the official figures, the OBR said that the government collected less money than it had expected from all the UK taxes. “This is likely to reflect liabilities having been hit more quickly than our scenario assumed and more non-payment of past liabilities due to cash flow issues for taxpayers,” the fiscal watchdog said.

Ministers have overruled their top officials 11 times on public spending since the coronavirus pandemic hit to bust parliament’s spending limits and the first signs of the extent of additional outlay became clear in the official figures.

Net departmental spending surged from £55.8bn in April 2019 to £91.4bn last month, a 64 per cent increase, of which only £5.2bn was spent on the government’s flagship job retention scheme to keep workers attached to their jobs.

Paul Dales, UK economist at consultancy Capital Economics, said that as there was “little prospect of a swift return this year towards pre-crisis levels of economic activity” he expected borrowing to total £340bn, or 17.5 per cent of gross domestic product, over 2020-21, which would be at least £40bn more than the OBR’s forecast.

Additional reporting by Philip Georgiadis

Editor’s note

The Financial Times is making key coronavirus coverage free to read to help everyone stay informed. Find the latest here.

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