Britain’s public debt is larger than the size of the country’s economy for the first time since 1963.
Figures released this morning by the Office for National Statistics (ONS) showed that in May, the country borrowed a record £55bn raising the figure by £173bn over the last year to reach £1.95tn, or 100.9% of GDP.
Compared with May 2019, it is the largest year-on-year increase in debt as a percentage of GDP on record.Central government net cash requirement in May 2020 was £62.7 billion, £46.1 billion more than in May 2019, the highest cash requirement in any May on record.
The £55.2 billion borrowed by the public sector in May 2020 is the highest monthly total on record (records began in January 1993).
Latest published figures from the Office for Budget Responsibility’s (OBR) coronavirus reference scenario suggest that borrowing in the current financial year (April 2020 to March 2021) could be £298.4 billion, around five times the amount borrowed in the latest full financial year.
However according to a report out this morning from the Institute of Fiscal Studies, as long as the government can continue to borrow very cheaply, then what really matters for the public finances is not the size of the temporary spike in borrowing that is inevitable during the current lockdown, but rather the extent to which current weakness in the economy persists in subsequent years.
This year will likely see a record increase in borrowing, bringing it to levels not seen since the Second World War. As long as the threat of the virus fades and the lockdown ends, the economy will rebound sharply next year. This – combined with the assumption that the emergency measures implemented since the Budget are allowed to expire – should see the deficit fall very sharply next year.
The real risk from this crisis is that the economy remains weaker than forecast before the COVID-19 pandemic for a protracted period. That is our central scenario – in contrast with baseline scenarios set out by the OBR and Bank of England – reflecting our view that the economy is likely to take several years to adjust. The rapid transition to a relatively rudimentary free trade agreement at the end of 2020 risks hampering the recovery further, potentially compounding the damage to output in the longer-term.
Continued weakness in the economy could leave borrowing at over 5% of national income (or £130 billion) in 2024–25. That would be 3% of national income – or about £70 billion – higher than was forecast in the March Budget. There is clearly considerable uncertainty around this projection, but even under a scenario with a faster recovery we project that borrowing in 2024–25 could still be running about £40 billion higher than forecast in March.
Ben Nabarro, a UK Economist at Citi and a co-author of the joint new report, said:
“Shut-downs resulting from COVID-19 have slashed nearly two decades of growth from the UK economy in just two months. The shape of the economic recovery is now the key question. As the economy reopens, growth will inevitably rebound. However, a full recovery in output is unlikely to be quick and simple. In the aftermath of COVID-19 and Brexit, the structure of the UK economy is likely to change materially. This implies persistent unemployment, weaker household sentiment and a slower recovery. It also makes it more likely the crisis results in significant permanent losses in UK output.”
Isabel Stockton, a research economist at the Institute for Fiscal Studies, and a co-author of the joint new report, said:
“This year will see a record increase in government borrowing, most likely pushing it to its highest level since the Second World War. Even so, with current low interest rates, additional borrowing now that boosts the economic recovery would still be worthwhile. The future health of the public finances will depend greatly on the strength of the subsequent recovery. But once we are through the immediate crisis and the economy reaches a new normal, we will be left with elevated debt. At that point a mix of some tax rises alongside an acceptance that higher debt will need to be managed carefully for decades to come seems the most likely outcome.”
