Treasury adds £50bn more to burgeoning Covid debt pile
Borrowing in first five months of financial year to hit record £275bn fuelling fears over tax increases
THE Treasury is to borrow another £50bn in August as it races ahead with a record debt spree to fight the coronavirus pandemic and plug a collapse in tax revenues.
It means borrowing will hit £275bn in the opening five months of the financial year – an unprecedented pace to match the extraordinary strains on the public finances as the country reels from the biggest challenge since the Second World War.
The figures will spark concern that Britain will be paying for the crisis for years to come through higher taxes.
Economists had expected the staterun Debt Management Office to set out plans for September too, but it decided not to amid a rapidly changing situation with economists unable to predict the scale or speed of any recovery.
The nation’s debts are rocketing after Rishi Sunak, the Chancellor, unveiled a historic package of state support to protect jobs from the ravages of the coronavirus lockdown.
Big contributors to the extra deficit include the Chancellor’s furlough scheme, which the Office for Budget Responsibility estimates will cost £60bn; support for the self-employed totalling £15bn; the same amount again in business grants; almost £12bn of cuts to business rates; and an extra £16bn on public services like the NHS.
Funding for another £40bn of taxpayer-guaranteed loans is not included in the estimates, with their final cost to the Exchequer likely to stretch out for years to come.
Boris Johnson is expected to launch a £1.5bn school-building blitz to boost the economy after lockdown, and will today set out other infrastructure projects including details of 40 new hospitals which have already been promised alongside major spending on housing, roads, railways and prisons.
The Government is already on course for the biggest deficit in peacetime history. As ministers must also issue bonds to refinance old debts as they come due, the DMO will have to raise about £420bn this year.
Morgan Stanley expects the Bank of England to add another £100bn to its money-printing programme later in 2020, meaning the central bank will absorb £400bn of bonds in the secondary market – close to matching all gross issuance by the DMO.
Bank officials have denied they are taking part in so-called monetary financing, a policy associated with hyperinflation in Zimbabwe and Thirties Germany where new cash is created solely to fund state debt.
The scale of the economic shock is such that the Government will borrow heavily for some time to come.
Economists expect public borrowing to remain at about £155bn next year, according to private forecasts collated by the Treasury.
Meanwhile, British families are moving in the opposite direction by boosting their savings. Deposits held by households jumped a record £25.6bn in May, Bank of England data revealed yesterday, adding to a bumper cash pile built up by consumers over the previous two months.
Mortgage approvals slumped to re- cord lows as the housing market entered deep freeze and consumers continued to cut their debts, paying down credit cards and reducing overall lending for a third consecutive month.
Repayments on consumer credit dropped to £4.6bn in May, down from £7.4bn the previous month.
Samuel Tombs, of Pantheon Macro, said: “Households’ spending likely will rebound over the summer, as some recently accumulated cash is spent.”