Government borrowed year’s worth of money in one month
Government’s £62bn borrowing bill caps a shocking week of official numbers
BRITAIN’S borrowing hit more than £62.1billion in April, it is estimated – the most in any month since records began in 1993, and nearly six times the amount in the same month last year.
In the last full financial year, estimated borrowing was £62.7billion.
The data lays bare the impact of the Government’s coronavirus spending, with the furlough scheme alone costing £14billion last month.
Jonathan Athow, deputy national statistician at the Office for National Statistics, described the figures as “pretty much unprecedented”. But he said it was impossible to forecast the current year’s public finances because of the “high amounts of uncertainty”.
Rishi Sunak, the Chancellor, insisted that if the Government had not provided financial support, the economic cost would be much worse. He said: “Our top priority is to support people, jobs and businesses through this crisis, and ensure our economic recovery is as strong and as swift as possible. That’s why we have taken unprecedented steps to provide lifelines to people and businesses with our furlough scheme, grants, loans and tax cuts.”
A fall in tax receipts and National Insurance contributions also significantly contributed to the rise in borrowing, with Government receipts falling by 26.5 per cent for the month compared with April 2019.
The ONS said that public debt as a share of national income jumped 17.4 percentage points in the past year to stand at 97.7 per cent, the highest burden of debt in the UK since 1963-64 when the country was still in recovery from the Second World War.
Charlie Mccurdy, researcher at the Resolution Foundation, suggested that while the figures were “stark” it did not mean that the UK’S debt level could not remain “manageable”.
He said: “The latest borrowing figures offer a stark illustration of the fiscal costs of coronavirus and the lockdown measures required to contain it, with the Government borrowing as much last month as it did during the whole of last year. But while there is significant pressure on the public finances, there are no signs that the Government is struggling to find the cash. Record low interest rates mean the UK’S higher debt burden should remain more than manageable.”
However, Isabel Stockton, research economist at the Institute for Fiscal Studies, warned that tax rises or spending cuts could be necessary if the Government is forced to commit to high borrowing. She said: “There will clearly be a substantial spike in borrowing this year. What this means for policy will depend crucially on the shape and extent of the recovery that follows. If the increase in borrowing is a one-off, then one option could be to manage down the elevated debt stock gradually over many years.
“Should higher borrowing endure ... then tax rises or spending cuts would be needed if borrowing is to be returned to its pre-crisis path. Any additional spending pressures arising from the current crisis would also put upward pressure on taxes.”
Dramatic 22.6pc slump in retail sales wipes out 15 years of growth in one month However, cheap borrowing costs cushion hit from rising deficit
‘The cost of the furlough scheme for workers has come to £21bn so far over April and March’
RECORD borrowing and an unprecedented collapse in retail sales have laid bare the devastating impact of the lockdown after Britain reported its worst ever week of economic data.
The Treasury borrowed £62.1bn in April, the biggest single monthly figure in history, as tax revenues crashed and spending surged.
It left a deficit far bigger than at the height of the financial crisis and without equal in peacetime, giving weight to Chancellor Rishi Sunak’s warning earlier this week that the country is gripped by a “severe recession the likes of which we have not seen”.
The figures follow evidence of surging unemployment and grim survey readings pointing to a 20pc nosedive in GDP this quarter.
In just one month, the Government borrowed almost exactly the same as during the entire last financial year as part of massive efforts to fight the crisis. Borrowing in April was far more than planned for the whole of 2020-21.
Taxpayers are footing the bill for an unprecedented package, including a furlough scheme covering eight million workers until October.
The dire public finance data were accompanied by more evidence of the impact of the UK’S economic deep freeze on shops, as retail and fuel sales volumes plunged by 22.6pc from the same month a year earlier.
The record collapse in sales effectively wipes out 15 years of growth in retail, with a serious knock-on effect for the Treasury.
In April last year, VAT raised £13bn for the Government. This time it cost the Treasury £900m – the first negative reading since 1981 – as the plunge in sales slashed the tax haul and businesses put off their bills, meaning rebates to companies exceeded the amount paid.
Meanwhile, collections from households plunged by more than £6bn, with lower income tax, national insurance and capital gains tax payments after a surge in unemployment.
Corporation tax receipts were just over £4bn lower than in April 2019.
The Office for National Statistics (ONS) data showed comfortably the highest borrowing on record, stretching back to January 1993, as the Government moved toward wartime levels of spending to tackle the outbreak. The national debt has also jumped £118.4bn, or 17pc, in a single year to £1.9 trillion, its biggest yearly increase on record.
The surge will further embolden hawks in the Treasury who are pushing for austerity including tax rises, despite fears this could derail a recovery.
Pablo Shah, of the Centre for Economics and Business Research, said: “The debt-to-gdp ratio is likely to fall relatively swiftly in subsequent years, as the UK gradually builds back up its productive capacity.
“None the less, it will settle at a level far above where it was prior to the coronavirus crisis, at which point the Government will have to confront the trade-off between meeting its election pledges to scale up investment or focusing on addressing the newly expanded debt burden.”
The cost of the furlough scheme – treated as an employer subsidy by the ONS – has come to £21bn so far over April and March.
The Chancellor hopes the cost of the scheme will start to come down as parts of the economy reopen and workers can go back to factories, building sites and offices.
From August, employers will have to pick up a slice of the cost of the furlough programme, which pays workers up to £2,500 per month.
It means those eight million workers are not unemployed. However, there was still a steep rise in joblessness.
More than 850,000 people signed up for unemployment benefits last month, the biggest rise since early 1947 when severe snow temporarily froze the economy.
At the same time, the number of job vacancies available in the three months to April fell 170,000, the steepest drop since the ONS started recording these numbers almost 20 years ago.
However, the cost of financing the enormous public debt has not so far proved to be a problem.
For the first time ever this week, the Government issued a bond at a negative interest rate, indicating that investors are so keen to keep their cash in a safe asset that they are willing to pay for the privilege.
Cheap borrowing costs are also supported by low inflation, which dropped to 0.8pc last month as measured by the consumer prices index, as well as £200bn of bond buying through the
‘For the first time ever this week, the Government issued a bond at a negative interest rate’
Bank of England. The Bank has also discussed cutting its base interest rate into negative territory, which would be its most radical attempt so far to support the economy. Economists hope the gradual relaxation of the lockdown should let workers, shoppers and businesses return closer to normal.
Martin Beck, at Oxford Economics, said it could be “the end of the beginning” as the reopening gets cautiously under way. He said: “A recovery in activity over the summer should gain strength from low inflation and the resulting boost to spending power.”
The Governor of the Bank of England says it won’t happen. The markets say it will, and probably very soon. You can take whichever half of that bet you want, but it shouldn’t take very long to work out which is the right side of the trade. It remains to be seen when precisely it happens, but negative interest rates are now a clear possibility in the UK over the next few months.
There is nothing especially unusual about that. Rates have already dipped below zero in Japan, the eurozone, Switzerland and Sweden. The results so far, to put it politely, have been mixed. In this country, however, they are likely to have a far more dramatic impact than they have elsewhere.
Why? Because we have a far larger banking sector than most countries; because we never need much to spark a housing bubble; because we have a government with an insatiable appetite for debt; and because we have a far more financialised economy than most major countries. The experience of the rest of the world may suggest negative rates are tolerable – but that won’t be true for Britain.
Over the course of the past week, the bond markets have started pricing a range of gilts below zero. In effect, investors are paying the Government for the privilege of lending it money.
In the wake of the Covid-19 crisis, and with the country heading into the deepest recession of the past hundred years, that was probably unavoidable.
Will the Bank of England follow that up with an official base rate of below zero? On taking office, Andrew Bailey, the new Governor, explicitly ruled that out. More recently, he has been “umming and ahhing”. In the City, that is increasingly being taken as a whispered yes.
It will be a dramatic headline when it happens, although by no means a novel one. There is already plenty of experience from around the world.
Japan has had negative rates for years; so have the eurozone and Switzerland. In Denmark, a negativerate mortgage was launched last year, and Swiss banks have already started sending customers an invoice for the hassle of holding on to their cash. They are certainly not a magic bullet. None of the countries that have tried them have seen a sustained recovery.
Sweden has done the best, and managed to move rates back into positive territory, but Japan has been locked in a slump for years.
The important point, however, is this. At the macro level, negative rates may not make a huge amount of difference (after all, our current base rate of 0.1pc is hardly eye-wateringly generous). But they profoundly change the way the financial system works for companies, investors and consumers.
And they are likely to have a bigger impact on the UK than in other countries. Why? There are four reasons for this.
First, whatever else negative rates might do, they cripple the banking system. Banks make money by collecting cheap deposits from customers and lending it out at higher rates to companies and individuals.
When rates turn negative, the entire business model starts to unwind. Nobody wants to put money in the bank (cash holdings have increased significantly in every country where they have been tried) and there isn’t anything to be made from lending it out. Ever since rates went negative, Japan has had weak banks that don’t want to lend, and so does the eurozone. The UK doesn’t have quite the biggest banking sector in the world. China and the United States hold the top two slots. But, according to The Banker magazine, we are in third place. With major banking conglomerates such as HSBC and Barclays based in the UK, and with the City among the world’s most significant financial centres, any
‘We already had a problem with house prices being too high. Negative rates are only going to make it worse’
damage to the industry is going to have huge knock-on effects for the whole economy.
Next, in most countries, negative rates have sparked a rise in other asset prices. There is nothing very surprising about that. You get charged to keep money in the bank, so you might as well do something else with it. Pantheon Macroeconomics estimated last year that negative rates in the eurozone had driven up house prices by 16pc. In Britain, you could double or triple that number: we remain a property-obsessed country where it takes only a tiny spark to drive the market up. We already had a problem with house prices being too high. Negative interest rates are only going to make it worse.
Thirdly, they create escalating government debt. The state keeps on borrowing more and more money, mainly because it gets paid to do it.
It starts to replace tax as a way of funding the government. Japan already has a debt-to-gdp ratio of 234pc, and it keeps on going up.
UK governments have never needed any encouragement to live beyond their means – but negative rates will reward them anyway. Don’t be surprised if governments get hooked.
Finally, negative rates encourage a huge increase in financial engineering, from share buybacks and leveraged buyouts, to reworking balance sheets with debt. Plenty of corporate bonds are already trading at negative rates, and that is only going to continue.
The trouble is, the UK already has a corporate sector that relies too much on financial engineering and not enough on the real sort. We could be about to make that much worse.
No one envies Bailey taking over at the Bank. The new Governor faces a uniquely difficult set of challenges.
No one really knows how a 21st century developed economy should deal with a pandemic. Putting a minus sign in front of the base rate may seem one potential tool for fighting a depression. Other central banks have tried it, and claimed some success. In truth, however, for the UK, negative rates are going to do far more damage than they have elsewhere – and they shouldn’t even be a last resort.