The cost of coronavirus-related government expenditure in recent months has sent the UK national debt above the £2tn mark in August 2020 for the first time since records began. National debt now stands at more than the value of the economy – representing 101.9% of GDP. The central government’s expenditure on fiscal stimulus packages, which ranges from the furlough scheme to bailout of rail firms, during a period of decreasing tax receipts, has put considerable pressure on public finances, which are on track to achieve record peacetime deficits in the 2020-21 financial year.
Effect of pandemic
Escalating government expenditure
Public expenditure rose by almost a third in August 2020, compared to the same period last year, as the government tries to aid the UK economy in its path to recovery. Support to workers idled from the pandemic was the largest contributing factor of the increase in spending, accounting for over half of the year-on-year rise, with £6bn paid to fund salaries of furloughed workers and £4.7bn paid to cover some of the lost income of self-employed workers. In addition, the Treasury-sponsored “Eat Out to Help Out” Scheme, which was aimed to provide a much-needed boost to the hospitality sector, increased public spending by a further £500m in August 2020, reaching a total of £78.5bn for the month, £19.5bn higher than the same period last year. The furlough scheme, in particular, has hugely impacted public finances in recent months, costing more than £39bn since its onset in March.
Government income falling amidst economic slowdown
Alongside rising public spending, tax-cutting policies were implemented by the central government in order to provide a further boost to the struggling UK economy. However, the resulting 17% fall in tax receipts in August 2020, compared to the same month last year, has had a considerable toll on public finances, contributing to the increased government deficit. VAT reduction from 20% to 5% in July 2020 for firms in the hospitality, accommodation, and attraction sectors, led to a £3.7bn fall in revenue year-on-year, whilst a substantial slowdown in business activity has led to a similar fall in corporation tax revenue. The combination of falling VAT and corporation tax revenues meant that central government tax receipts fell sharply to £37.3bn in August 2020, £7.5bn lower than the same month last year, according to the Office for National Statistics.
Increasing public expenditure in the face of falling tax receipts has led the UK central government to borrow £35.9bn in August 2020, more than any single month since 1993, when monthly records began. This brings total borrowing between April and August 2020, the first five months of the financial year, to £221.2bn, 11 times the previous highest-ever cash borrowings in this period of the financial year. However, the actual figure could turn out to be even larger, as the official statistic is yet to include any losses on government-backed loans to firms and the additional £24bn of healthcare-related spending that was announced at the end of last week. As of the end of August, the UK national debt stands at £2.024tn, £249.5bn more than the same period last year, making it the first time it has surpassed GDP since the early 1960s. To put this in perspective, this works out to roughly £30,000 per person living in the UK. Government borrowing, which is estimated to reach around a fifth of GDP by the end of the financial year, would represent the largest deficit in British peacetime history. This is more than the £157.7bn, or 10.1% of the economy, it reached in the 2009-10 financial year.
Outlook for the remainder of the financial year
The coronavirus pandemic, which has brought havoc upon public finances, is expected to continue to do so for the remainder of the year, albeit at a decelerated rate. The fiscal deficit in the first 5 months of the financial year has reached £221.2bn and is expected to rise by a further £151bn until March 2021, reaching a total of £372.2bn in the 2020-21 financial year, according to estimates from the Office of Budget Responsibility, the Treasury’s independent forecaster. However, Andrew Wishart, an economist at consultancy firm Capital Economics, pointed out that actual borrowing was 22% below the Office of Budget Responsibility’s expectation for the first five months of the financial year, demonstrating how difficult it can be to provide accurate estimates, particularly during a pandemic. If this trend were to continue, total borrowing would reach £290bn in the 2020-21 financial year, representing a considerably lower, but still record-breaking, 14% of GDP.