The UK’s budget deficit is set to increase to a level never before seen in peacetime, as government borrowing to cover the coronavirus cost burden skyrockets.
In a statement to financial markets, the Treasury said it would seek to raise £180bn over the next three months to allow it to meet its spending needs as tax revenues plunge. This is on top of £45bn already planned for April.
The Financial Times reports that “the government is likely to find willing buyers for the avalanche of gilts it will place on the market in coming months because the Bank of England has pledged to snap up £200bn in the secondary market under its latest and largest quantitative easing programme”.
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“The government’s gilt sales to City investors and overseas asset managers are typically higher than the budget deficit – the annual shortfall between public spending and income from tax receipts – as it includes raising money to refinance existing government bonds,” says The Guardian. “However, the vast increase in gilt sales suggests that borrowing is expected to balloon, as the state pays workers’ wages and as more people claim unemployment benefits”.
“One reason is the huge cost of programmes such as furloughing, now expected to cost well north of £50bn,” says BBC economics correspondent Andy Verity. “The other reason is that the government's revenues - the tax it collects through income tax, VAT and national insurance - are collapsing. If you shut down much of the economy, you also turn off the tap on much of the government's tax income.”
The Office for Budget Responsibility (OBR) has warned that the budget deficit could surge to £273bn this financial year - 14% of GDP, which “would be the largest single year deficit since the Second World War”, the Daily Express says.
The picture for the full financial year looks even bleaker.
The OBR estimates that the government might need to borrow up to £382bn for the year, about seven times what was expected pre-Covid. “That depends, though, on the shutdown being lifted sooner rather than later,” says Verity.
The Resolution Foundation thinktank, meanwhile, calculates that a six-month lockdown would require the government to raise around £500bn in financing this financial year.
“It signals a massive challenge ahead for the government to claw back cash at a time when it is also, currently, determined to press ahead with its election agenda of ‘levelling up’ UK regions,” says Sky News.
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