The ONS will release its latest monthly public finance estimates at
7 a.m. on Friday 19 June. They will show that across April and May
government borrowing ran at record levels, pushing up government
debt substantially. As long as the government can continue to
borrow very cheaply, then what really matters for the public
finances is not the size of the temporary spike in borrowing that
is inevitable during the current lockdown, but rather the extent to
which current weakness in the...Request free trial
The ONS will release its latest monthly public finance estimates at
7 a.m. on Friday 19 June. They will show that across April and May
government borrowing ran at record levels, pushing up government
debt substantially.
As long as the government can continue to borrow very cheaply, then
what really matters for the public finances is not the size of the
temporary spike in borrowing that is inevitable during the current
lockdown, but rather the extent to which current weakness in the
economy persists in subsequent years.
A new report produced by researchers at the Institute for Fiscal
Studies and Citi presents different scenarios for the economy over
the next few years and what these might mean for the public
finances.
Key findings include:
-
This year will likely see a record increase
in borrowing, bringing it to levels not seen since the Second
World War. As long as the threat of the virus fades
and the lockdown ends, the economy will rebound sharply next
year. This – combined with the assumption that the emergency
measures implemented since the Budget are allowed to expire –
should see the deficit fall very sharply next
year.
-
The real risk from this crisis is that the
economy remains weaker than forecast before the COVID-19
pandemic for a protracted period. That is our
central scenario – in contrast with baseline scenarios set out
by the OBR and Bank of England – reflecting our view that the
economy is likely to take several years to adjust. The rapid
transition to a relatively rudimentary free trade agreement at
the end of 2020 risks hampering the recovery further,
potentially compounding the damage to output in the
longer-term.
-
Continued weakness in the economy could leave
borrowing at over 5% of national income (or £130 billion) in
2024–25. That would be 3% of national income – or
about £70 billion – higher than was forecast in the March
Budget. There is clearly considerable uncertainty around this
projection, but even under a scenario with a faster recovery we
project that borrowing in 2024–25 could still be running about
£40 billion higher than forecast in March.
-
Under all the scenarios we consider, debt
would increase sharply this year, and then continue
rising. Nevertheless, given the low current cost of
borrowing, it would be worth doing additional one-off
borrowing now that leads to a stronger subsequent recovery. And
any policy action to reduce the deficit should not be
implemented until the economy is back to more normal
performance.
-
Despite the much higher level of debt, we
forecast that debt interest payments will be lower over the
next five years than was expected back in
March. This reflects the effects of quantitative
easing, the lower bank Base Rate and very low interest rates on
government debt.
-
This crisis will lead to debt being elevated
for many years to come:
-
If interest rates remain low this need not be
problematic. But the public finances would be
more exposed to increases in interest rates not associated
with stronger economic prospects. This risk is
exacerbated by the growing share of government debt that is
held by the Bank of England’s Asset Purchase Facility and
therefore effectively financed at Base Rate.
-
If long run growth rates reach levels
forecast in the March Budget, we would still need a fiscal
tightening (probably tax rises) of £30-40 billion just to
stabilise debt at a level around 100% of
GDP.
-
If we decide we want to increase spending
on welfare, health or social care in the aftermath of this
crisis then an even bigger fiscal consolidation (set of tax
increases) would eventually be
needed.
Ben Nabarro, a UK Economist at Citi
and a co-author of the joint new report, said:
"Shut-downs resulting from COVID-19 have slashed nearly two decades
of growth from the UK economy in just two months. The shape of the
economic recovery is now the key question. As the economy reopens,
growth will inevitably rebound. However, a full recovery in output
is unlikely to be quick and simple. In the aftermath of COVID-19
and Brexit, the structure of the UK economy is likely to change
materially. This implies persistent unemployment, weaker household
sentiment and a slower recovery. It also makes it more likely the
crisis results in significant permanent losses in UK output."
Isabel Stockton, a research economist at the Institute for
Fiscal Studies, and a co-author of the joint new report,
said:
"This year will see a record increase in government borrowing, most
likely pushing it to its highest level since the Second World War.
Even so, with current low interest rates, additional borrowing now
that boosts the economic recovery would still be worthwhile. The
future health of the public finances will depend greatly on the
strength of the subsequent recovery. But once we are through the
immediate crisis and the economy reaches a new normal, we will be
left with elevated debt. At that point a mix of some tax rises
alongside an acceptance that higher debt will need to be managed
carefully for decades to come seems the most likely
outcome."
|
