UK’S debt may soon eclipse the economy

BRITAIN’S national debt is poised to surpass the size of the economy due to the cost of the Government’s coronavirus support measures and the faltering recovery, economists say.

Last week Chancellor Rishi Sunak unveiled the Job Support Scheme, to replace the furlough scheme at the end of October. It will cover three quarters of workers’ normal salaries for six months. Among other support for the economy, he scrapped a planned increase in VAT for hospitality and leisure firms.

The measures, say the influential EY ITEM Club think tank, will increase Government borrowing for the year by £30billion to £360billion. With GDP shrinking, economists believe the national debt will soon be worth more than the economy, which was worth £2.09trillion last year. Britain currently owes £2.02trillion.

EY Item Club chief economic adviser Howard Archer said: “Over all, Sunak’s package is less generous that furlough, but our forecast for total public borrowing this year is £360billion, which has gone up due to the announcement and the extra spending. The national debt will exceed 100 per cent of GDP.”

Philip Shaw, chief economist at Investec, said: “The job support scheme is going to cost a fair amount, but less than furlough. But it is yet more pressure on the public sector finances. It is a horrible reminder of the scale of the challenge and that money has to be repaid, but how is a question for another time.

“We are looking at a record debt figure as both a percentage of GDP and in cash terms.”

Capital Economics senior UK economist Ruth Gregory said that even though the national debt-to-gdp ratio will go from 88.4 per cent in 2019/20 to 102 per cent for this financial year, Sunak’s latest measures will help temporarily reduce the virus damage to the economy.

“At the very least, this extra fiscal support should help to temper the rise in unemployment at the end of furlough, prevent further corporate insolvencies and boost activity in the hospitality sector at the start of 2021,” she said.

However, with Britain experiencing an increase in the infection rate and the possibility of more restrictions on the economy, Gregory warned that unemployment could rise from 4.1 per cent to 7 per cent by the middle of next year. “We suspect the effect of the Government’s new restrictions announced last week and the possibility of tighter ones in the coming months will outweigh any downward impact on unemployment from the fiscal package.”