UK government deficit soars to record high on pandemic borrowing - Financial Times

The UK government deficit is on course to hit a peacetime record in 2020-21 as its climb prompts chancellor Rishi Sunak to impose an immediate freeze on public sector pay awards outside the NHS.

The government needed to borrow £260.8bn to cover the gap between its spending and revenues from April to October, according to the Office for National Statistics on Friday, the highest figure since comparable records began.

The extra borrowing lifted total public sector net debt to £2,076bn at the end of October, larger than the estimated size of the UK economy. In the same period of 2019-20 the government borrowed £33.4bn.

Economists do not expect big improvements in the outlook for the public finances in 2020-21 because economic progress has been stalled by the second wave of coronavirus and Mr Sunak has extended his support packages through the winter.

Although the size of the full-year deficit is likely to be lower than the £400bn feared this autumn, it will be close to double the level of borrowing at its peak after the 2008-09 global financial crisis and the largest on record in peacetime.

The Treasury wants to show it takes the state of public finances seriously and is planning cuts to public pay and also the overseas aid budget next week, when Mr Sunak announces his spending review.

Pay deals for next year at inflation or below will be given to most of the 5.5m state workers whose salaries are determined by the government’s pay review bodies — including teachers, police and civil servants. The exception will be NHS frontline staff, who will be singled out for higher awards because of their work during the Covid-19 pandemic.

The Treasury has pointed to Mr Sunak’s comments in July regarding the need for “restraint” in future public sector pay awards.

Although the spending review is now limited to one year, the chancellor could decide to extend public sector pay curbs beyond 2021-22. A report by the Centre for Policy Studies think-tank calculated that a three-year pay freeze excluding health could save £7.7bn annually by the end of the period, yielding a modest contribution to deficit reduction.

Union leaders expressed anger at the idea of further curbs for public sector workers, who have already endured real-terms pay cuts for most of the past decade.

Mike Clancy, general secretary of the Prospect union, said another pay freeze would be “economically illiterate” when the economy needed an injection of consumer demand.

“After a decade of pay austerity in the public sector which has seen pay increases lag behind inflation and the private sector, a further pay freeze across the public sector will be seen as an insult and have a devastating impact,” he said.

The government continues to rule out controlling public expenditure as tightly as it did under austerity policies over the past decade. It has also said it will not raise the main tax rates, meaning deficit reduction will be difficult if the economy fails to recover quickly from the Covid-19 crisis.

The sharp contraction in economic output in 2020 is on course to be the worst in more than 300 years. Forecasts next week are set to show a lasting hangover until the middle of the decade even after a bounce-back next year.

The ONS revised its estimates of borrowing earlier in the pandemic by £15.7bn on the basis of new information.

Samuel Tombs, UK economist at Pantheon Macroeconomics, said he expected the deficit for the full year to “come in close to the £372bn” forecast by the Office for Budget Responsibility in August. That would be about 18 per cent of national income.

Tom Scholar, the top official at the Treasury, said on Thursday that the level of debt was likely to rise to 105 per cent of gross domestic product this year.

If the economy recovers strongly and a vaccine is effective in combating Covid-19, public borrowing is likely to drop rapidly in 2021-22, but there is likely to be a hangover from this crisis in lost growth and persistently higher unemployment.

This will probably keep public borrowing above £100bn at the time of the next election, twice previous forecasts, with public debt still continuing to rise on an annual basis.

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2020-11-20 09:45:00Z
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