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It was inevitable that borrowing would hit a peacetime record this year. In April alone, the government borrowed more in a single month than was expected for the whole year before the coronavirus pandemic struck.
According to the first official Covid-19 cost estimates, the government borrowed £62bn in April, more than at any time since comparable records began in 1993. Not even the depths of the 2008 financial crisis come close.
Tax income in April was obliterated with the economy at a standstill, while spending soared as the government sought to cushion the blow. The Office for Budget Responsibility, the Treasury’s tax and spending watchdog, reckons the deficit could max out close to £300bn this year, five times the sum borrowed a year ago, and almost twice as much as after the banking crash.
The deficit is the shortfall between government income and spending as measured each month by the Office for National Statistics. Tax receipts make up the vast majority of income, while spending on welfare, schools, healthcare and pensions make up most of its outgoings.
Successive governments have racked up deficits since 2000-2001, the last time Britain recorded a budget surplus. The deficit ballooned after the financial crisis as the economy went into recession.
When the government spends more than it receives, this adds to the overall level of the national debt – or the cumulative annual deficits ran over the past several decades. The national debt stood at £1.8tn at the end of October.
The deficit matters because it signals the strength of the government’s control over the public finances, which is important for convincing investors that Britain can pay back the money it borrows. More importantly, the government must pay interest on its debts to the investors it borrows money from such as pension funds, City banks and asset managers. The higher the debt, the more interest the government must pay, potentially cutting funds available for public spending.
A decade ago, Britain would have been described as living beyond its means. This time around, warnings about maxed-out credit cards will only come from yesterday’s men who favoured austerity. It appears there is now broader acceptance of an argument defeated by the Conservatives a decade ago – that the budget deficit is more complex than a family’s bank balance.
The household metaphor holding sway today is about public borrowing and central heating: it’s supposed to come on when the weather is cold. And right now, despite the late spring sunshine, the economic outlook for Britain is wintery bleak.
But well above and beyond the tools a family could call upon to handle a blowout credit card bill, Britain has the advantage of the Bank of England sinking interest rates to the lowest level in its 325-year history, alongside its £645bn quantitative easing programme – sucking up government debt to keep borrowing costs low.
Although the national debt – the sum total of all annual deficits – surged by 17.4 percentage points to 97.7% of GDP in April – about £1.9tn – interest payments on government bonds fell by £1.2bn comparedwith a year ago.
There are hopes that Britain can escape 2020 without a major structural deficit – persistently higher levels of annual borrowing. Ministers are banking on growth bouncing back as lockdown measures are lifted, and that the nation’s productive capacity is kept intact thanks to their emergency support schemes. Under such a scenario, the deficit could shrink rapidly.
But there are signs the crisis could go on for longer than first anticipated. As acknowledged by the chancellor, Rishi Sunak, the jury is out on how big the long-term damage will be.
Once the immediate health emergency passes, focus will however turn to tackling the deficit. Especially if the extreme levels of borrowing in April continue.
Leaked Treasury documents have though suggested austerity could be on the menu again to tackle soaring borrowing levels. But unlike previous occupants of his office, the chancellor has so far expressed a preference for growing the economy to cut the deficit.
The lessons from a decade ago suggest a fresh round of cuts would choke off any recovery, making matters worse for the public purse down the line. Britain could prove to be intensely relaxed about higher levels of borrowing for some time to come.
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