U.K. government debt passed 2 trillion pounds ($2.6 trillion) for the first time, a milestone that will stoke the debate over how Chancellor of the Exchequer Rishi Sunak should finance his unprecedented support for the pandemic-ravaged economy.
It means what Britain now owes exceeds 100% of economic output, the heaviest burden since the early 1960s, the Office for National Statistics said on Friday.
The data will add to the pressure on Sunak to say how long he is prepared to allow borrowing to accumulate unchecked. Few are calling for immediate action. Debt-servicing costs are at record lows and economists have warned that withdrawing fiscal support prematurely could derail the nascent recovery from the deepest slump in living memory.
The figures reflect the loss of tax revenue after the lockdown imposed in March plunged the economy into a record recession, as well as the vast cost of government spending programs deployed to keep businesses and jobs afloat amid the pandemic.
In July, the budget deficit totaled 26.7 billion pounds, taking borrowing in the first four months of the fiscal year to 150.5 billion pounds. That’s close to the shortfall of 158.3 billion pounds recorded in the year following the global financial crisis.
While Sunak has ruled out a return to the austerity that his predecessor George Osborne pursued in the aftermath of the crash, he has acknowledged that government finances will need to be restored to health in the medium term.
“Today’s figures are a stark reminder that we must return our public finances to a sustainable footing over time, which will require taking difficult decisions,” he said on Friday.
More Borrowing
The pressure on Sunak, however, isn’t coming from the bond market. Gilts were little changed after the report and yields have fallen close to record lows since theBank of England slashed interest rates and injected billions of pounds into the financial system. Economists expect the central bank to loosen policy further later this year to support the fragile recovery.
More borrowing is on the way for now. The Debt Management Office plans to raise an additional 110 billion pounds between September and November, bringing total sale plans from the start of the fiscal year to 385 billion pounds.
Other key figures from Friday’s release include:
- The central government net cash requirement, the basis for bond issuance, climbed to almost 200 billion pounds in the four months through July, the most for the period since records began in 1984
- In July alone spending rose almost 23% from a year earlier, while government receipts fell about 17%.
Britain is facing a deficit of over 16% of GDP in the current fiscal year, the highest in peacetime history, and it could be more if Sunak yields to pressure to extend support programs that already total almost 200 billion pounds.
Budget deficits are escalating across developed nations and the U.K. is far from the most indebted, with Italy, France and the U.S. all forecast to have bigger debt-to-GDP ratios this year.
But the pandemic has hit Britain harder than most, with the nation seeing the worst second-quarter performance among major European economies, reflecting the fact that the lockdown went on for longer.
Still Friday also brought someencouraging news on the strength of the U.K.’s rebound, with a report showing retail sales rose 2% in July from June, 10 times the pace forecast by economists.
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