National debt passes £2trillion for first time

Record level of borrowing sees Chancellor warn of ‘difficult decisions’ as tax increases are predicted

BRITAIN’S national debt last month surged past £2 trillion for the first time, as Rishi Sunak, the Chancellor, warned that Covid-19 is piling “significant strain” on the creaking public finances.

The Treasury borrowed another £26.7billion last month as it fought to counter the economic carnage wreaked by coronavirus, while tax revenues plunged because of the recession and payment holidays.

An estimated £150.5billion has been borrowed so far this financial year, taking the national debt above £2trillion for the first time according to the Office for National Statistics. Debt is now equal to 100.5 per cent of GDP, a level not seen since the Sixties.

Mr Sunak warned that “difficult decisions” must be taken to help stabilise public debt after the latest borrowing binge, which was vital to fund furlough and other taxpayer schemes to protect incomes and businesses from collapse.

He said: “Today’s figures are a stark reminder that we must return our public finances to a sustainable footing over time.” Experts warned that he will likely turn to tax rises to rein in borrowing once the economic recovery has been secured.

The £26.7 billion borrowed in July was the fourth-largest monthly deficit since records began in 1993.

The three bigger months were April, May and June of this year, as ministers launched an unprecedented wave of support.

Tax revenues plunged to £56.6billion in July, in part because self-assessment income tax payments have been deferred to offer workers some breathing space.

Current receipts dropped by £11.3 billion, or 16.7 per cent, compared with July 2019. VAT receipts were down by more than a quarter to £9.8billion, while self-assessment income tax was cut nearly in half to £4.8 billion.

The Government also spent £77.6 billion in July, over a fifth more than a year earlier, but has ruled out a return to austerity, with taxes predicted to plug the hole in the public finances.

Mr Sunak is expected to take action to stabilise public debt once the economy has recovered from the blow dealt by Covid.

The Institute for Fiscal Studies has said that the Treasury must find £30billion to £40billion to keep debt at 100 per cent of GDP after the huge borrowing splurge. Torsten Bell, chief executive of the Resolution Foundation, said: “Yesterday’s data shows that the current crisis – and the Government’s rightly unprecedented efforts to fight it – are proving to be extremely expensive, with £150billion borrowed since April.

“But while our national debt is soaring, the cost of serving that debt is actually falling.

“Tax rises will eventually be needed to balance the books, but it is crucial this fiscal consolidation should only start once economic recovery has been secured.

“Going too soon risks choking off a recovery that will also be wrestling with the fact that the virus that has caused this recession is still with us.”

However, even this enormous level of borrowing is not as large as previously feared.

June’s deficit was revised down by £6billion to £29.5billion, and the Government is on track to run a significantly smaller deficit than anticipated by the Office for Budget Responsibility despite record borrowing.

On OBR forecasts, borrowing from April to July would have totalled £178.8 billion.

Instead, it is £150 billion, which may raise hopes that the OBR’S full-year forecast of a bumper deficit of £322billion may prove to be an overestimate.