Green shoots emerging but economy has further to climb
Furlough has saved jobs, maintained tax receipts and protected consumer spending,
Five years of borrowing have compressed into the past four months. Back in March, just as this crisis was beginning, the Office for Budget Responsibility predicted that the national debt would pass the £2 trillion mark in 2024-25. Instead, the coronavirus and its recession sent borrowing spiralling past that terrifying threshold in just four months.
Remarkable as it may seem, this is actually slightly less bad than feared.
The OBR’S July predictions indicated that vast spending programmes, combined with a recession that is off the charts of recent downturns, would force the Government to borrow almost £180bn between April and July. Instead the deficit came in at a mere £150.5bn.
This is still a vast number – any one of these past four months would have been an all-time record before this financial year.
But it also shows the first signs of hope that the situation is better than initially feared.
As unemployment has so far refused to spike, in large part due to the furlough scheme, income tax and national insurance revenues have fallen less steeply than might have been expected. Pay as you earn income tax for the financial year to date is exactly the same as it was in 2019.
Compulsory social contributions – largely national insurance – are down just 2.3pc, to £45.2bn.
The Office for National Statistics (ONS) slashed its estimate of borrowing in June by £6bn, or 17pc. This significant change came largely because tax receipts and national insurance payments were higher than first thought, indicating the economy is performing more strongly than expected.
This is backed up by retail sales numbers. Shoppers bought more last month than ever before, rebounding from the lockdown in some style.
What is more, they are showing tentative signs of getting back to old habits, visiting shops and cutting back a little on their online spending that had boomed through the pandemic.
Not all of consumption spending goes on retail. The hospitality industry has had an even tougher time of things, with restaurants and pubs only allowed to reopen from July 4.
But the extreme popularity of the Eat Out To Help Out scheme should have given them a boost in August and brought more people on to the high street with it.
More than nine-in-10 people have heard of the £10 discounts, according to the ONS, which represents a staggeringly successful cut-through to the general public’s consciousness.
By the middle of August more than 50pc said they had either used the special offer or were likely to do so.
Business surveys also show punchy growth for August, with the purchasing managers’ index from IHS Markit rising to its highest level since 2013.
It points to a broad-based recovery with the manufacturing and services sectors both growing strongly, as businesses report surging demand from consumers and from corporate clients.
The index aims to show growth from month to month, so reopening businesses should automatically boost the score, but it does not mean that production is back to its pre-covid levels.
The surveys contain a warning, too. Despite growth from the lockdown lows, business activity is still insufficient for companies to keep all of their staff.
As a result the employment index remains deep in the red, indicating steady redundancies that could in turn end up sapping demand and weakening the recovery.
Similarly, the retail numbers show the challenges ahead. For instance, clothes shopping is still down by about
‘People are showing signs of getting back to old habits, such as visiting shops’
a quarter, leaving many high street stalwarts in trouble.
And although the public finances might be in better shape than feared, £2 trillion is still a major debt.
As a share of GDP, debt is now back above 100pc for the first time since the early Sixties.
It is manageable for now because interest rates are extremely low, and it would be much worse to whack up taxes and slash spending before the recovery is complete. However the mountain of debt could pose a future threat if interest rates rise.
It seems unlikely now, but borrowing on this scale will be with us for decades and will need refinancing over the years, so changes in financial markets could cost the nation dear in years to come.
The economy has made a good start, but still has a long way to go before it gets out of this extraordinarily deep hole left by the coronavirus and the lockdown.