UK deficit may balloon to £500bn for this year and next
THE Treasury is set to borrow half a trillion pounds over two years as the cost of battling the coronavirus and lockdown recession mounts.
This year’s deficit will come in at about £350bn, according to the Institute for Fiscal Studies – a record for any peacetime year.
It will fall by more than half to £150bn next year, the analysts estimate, which still almost matches the £158bn borrowed at the peak of the financial crisis.
This debt mountain will pose a challenge to Rishi Sunak and his successors as chancellor for many decades to come as a result.
Carl Emmerson, of the IFS, said: “What is clear is that we are going to borrow more as a share of GDP than we did at the peak of the financial crisis, and the UK will borrow more as a share of GDP than it has done in the last 300 years outside of the two world wars.
“Managing that elevated debt will be a task not just for the current Chancellor but also many of his successors. It is going to take decades before we manage that back down to the levels we were used to before this crisis.”
The extra spending and tax cuts include the latest £30bn package announced by Mr Sunak.
This includes a bonus for businesses that take back furloughed staff, which could amount to more than £9bn; a cut to VAT for the hospitality industry with a value of £4.1bn; lower stamp duty by raising the threshold to £500,000, which amounts to almost £4bn of taxes; and a green homes grant of £2bn.
A similar stamp duty freeze helped drive up transactions in the wake of the financial crisis, the IFS said.
The Chancellor also disclosed an extra £33bn for public services since March on top of that previously publicised, with most going to the NHS.
The IFS said that an extra £31.9bn has already been spent on the NHS since the Budget. Furthermore, almost £5bn has gone to local government and social care, just over £5bn for public transport, £1.2bn for schools and £4.1bn for the Scottish, Welsh and Northern Irish administrations.
The IFS also said the furlough figures highlight the serious effect of the pandemic and lockdown on the younger generation, with more than 40pc of under-25-year-olds either furloughed or not working.
Only around one quarter of 35 to 54-year-olds are in the same position.
Mr Emmerson said: “At the moment the Government is borrowing incredibly cheaply. We think debt interest spending over the next few years is likely to be lower than we thought in March, despite the extra borrowing.”
However, low rates are not guaranteed to continue forever, posing a serious potential risk to the state’s financial health in future.
Mr Sunak said he intends to focus on stabilising the public finances in the coming years, but has given little detail on the form that might take.