U.K. Government Debt Tops 100% of GDP for First Time Since 1963

LONDON (Capital Markets in Africa) — U.K. government debt rose above 100% of the gross domestic product in May for the first time since 1963, reflecting a precipitous drop in economic output and a surge in spending to counter the fallout from the coronavirus pandemic.

Borrowing increased by more than 100 billion pounds ($124 billion) in the two months to May, as tax revenue plunged and the government deployed a massive support package to save jobs and keep businesses afloat during the lockdown.

The recession ripping through the economy will strain Britain’s public finances for several years to come. But the figures, released on Friday, will add urgency to government efforts to accelerate the recovery by lifting the remaining restrictions as the number of infections drop.

Spending on support programs to help economies weather the virus lockdown is blowing out budgets across much of the developed world, and Britain entered the crisis in better fiscal shape than many economies. Italy, among the worst hit and with a huge debt pile already, could see its ratio top 150% of GDP this year. France’s statistics office said Friday that its net debt ratio rose to almost 92% at the end of the first quarter.

U.K. figures show central government spending surged almost 50% in May from a year earlier and revenue plunged by over 28%, leaving borrowing at 55.2 billion pounds — the highest single month on record.

Bond investors showed little signs of concerns, reflecting their reliance on the Bank of England to keep borrowing costs at record lows. The yield on 10-year debt was steady at about 0.23%.

“The best way to restore our public finances to a more sustainable footing is to safely reopen our economy so people can return to work,” U.K. Chancellor of the Exchequer Rishi Sunak said. “We’ve set out our plan to do this in a gradual and safe fashion, including reopening high streets across the country this week, as we kickstart our economic recovery.”

Separate data Friday highlighted the long road ahead. While retail sales started to recover last month from their steep drop during the lockdown, they remain well short of their previous trend.

What Our Economists Say:“We now expect the economy to contract by 9.5% in 2020, down from our previous forecast for a slump of 7%. We also see a more modest rebound in activity in 2021 with the economy growing 6.5%. That compares with our earlier estimate of 9%.” — Dan Hanson, senior U.K. economist. 

The budget deficit in the current fiscal year, forecast to be around 55 billion pounds when Sunak took over, is now on course to top 270 billion pounds, according to the latest survey of private-sector economists compiled by the Treasury. That’s equal to about 14% of GDP, more than at any time since World War II.

The unprecedented 21 percentage-point increase in the debt burden over the past year — announced on Boris Johnson’s 56th birthday — means Britain owes more as a share of the economy than at any time since Harold Macmillan was prime minister, the Profumo scandal gripped the nation and The Beatles released their first album.

The pain may last beyond this year, with a report from the Institute for Fiscal Studies Friday warning that persistent economic weakness could mean that borrowing levels remain elevated well into the future.

A slow recovery could mean borrowing as much as 70 billion pounds more in the 2024-25 fiscal year than was predicted in March, the IFS said, while even a faster rebound may mean the figure is 40 billion pounds higher.

The precise cost of the pandemic is so unpredictable that the Debt Management Office has only announced its issuance plans through the end of July. The total for the first four months of the fiscal year stood at 225 billion pounds, and the DMO will release an updated outlook on June 29.

A cash-based measure that determines bond issuance showed the deficit surging to 62.7 billion pounds, taking the two months total to 126.2 billion pounds. The government paid out almost 22 billion pounds in wage subsidies over April and May, with the program for furloughed employees accounting for more than two thirds.

The figures come one day after the Bank of England decided to increase its bond-buying plan by 100 billion pounds, leaving it on track to buy almost 300 billion pounds of government bonds by the end of the year.

Source: Bloomberg Business News