British government borrowing and indebtedness



UK Public Finances Updates

UK public finances fell into the red in April as the coronavirus crisis worsened, leading to a record increase in government borrowing and an increase in its debt-to-national income ratio to the highest level in 57 years .

With economic activity likely to have fallen by around 30% and ministers removing controls on public spending, new official figures suggest the blow to the country’s finances has been worse than expected by the Office for Budget Responsibility, l budget oversight body.

Even though the crisis is still in its infancy, the numbers will strengthen the will of ministers to face the pandemic so they can restart much of the economy and start mending a huge hole in the government’s books.

There has been a dramatic deterioration in all measures of public finances, even when the figures are less certain than usual because some elements are based on very uncertain forecasts.

In light of these uncertainties, the Office for National Statistics has recommended taking a closer look than usual at the cash flows in and out of the public accounts, which can be better measured in real time.

The central government’s net cash requirement – the amount Whitehall was in the red in terms of liquidity – jumped to £ 63.5 billion in April alone, a deterioration of £ 73.3 billion from to a surplus of £ 9.8 billion in April 2019. This was the largest in a month. deterioration of the measurement since the start of the surveys in 1984.

A broader measure of the entire public sector’s cash position – the public sector’s net cash requirements – also jumped, to £ 88 billion in April, compared to the OBR estimate of 68 billion pounds sterling for the same month.

With such a surge in borrowing measures, public sector net debt jumped £ 118.4bn to £ 1.9bn, very close to the size of the entire the economy.

The ONS said public debt as a percentage of national income has jumped 17.4 percentage points in the past year to stand at 97.7 percent, the highest debt burden in the Kingdom United since 1963-64. At that time, the debt burden had been declining steadily from the peak reached after World War II.

Line graph of central government net cash requirements (in millions of pounds sterling) showing more borrowing in April than in any month of the financial crisis

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

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

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

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

The rally in UK sovereign debt was fueled by expectations of further interest rate cuts from the Bank of England.

The deterioration in public finances is partly due to a fall in tax revenue in April in addition to policy measures such as the government program allowing companies to defer payment of value added tax.

Income tax revenue through the PAYG system fell 28% in April compared with the same month a year earlier, with national insurance contributions down 25% and tax payments on companies are also particularly weak.

After analyzing the official figures, the OBR said the government had collected less money than expected from all UK taxes. “This probably reflects the fact that liabilities were hit faster than our scenario assumed and more non-payment of past liabilities due to cash flow problems for taxpayers,” the budget watchdog said.

Ministers have canceled their senior officials 11 times on public spending since the coronavirus pandemic hit parliamentary spending limits and the first signs of the scale of the additional spending have become clear in official figures.

Departmental net spending rose from £ 55.8bn in April 2019 to £ 91.4bn last month, an increase of 64%, of which only £ 5.2bn was spent on the flagship government job retention program to keep workers attached to their jobs.

Paul Dales, a British economist at the consultancy firm Capital Economics, said that with “little prospect of a rapid return this year to pre-crisis levels of economic activity”, he expected borrowing totals £ 340bn, or 17.5% of gross domestic product, over 2020-2021, which would be at least £ 40bn more than the OBR forecast.

Additional reporting by Philip Georgiadis

Editor’s Note

The Financial Times is making coverage of the major coronaviruses free to read to help everyone stay informed. Find the latest here.



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