Cheque Please: UK government borrowing hits record high
June 8, 2020
2 min read
What's going on here?
The Office for National Statistics has reported that the UK government’s borrowing hit a record £62bn in April.
What does this mean?
After heavy spending to provide financial support to businesses and employees to ease the impact of the coronavirus induced lockdowns, the government has had to borrow unprecedented sums. The cost to the government in April for the furlough scheme alone was £14bn. Such spending would usually be funded out of taxes. However tax revenues have also plunged in part due to COVID-induced policy measures such as the government’s scheme to allow companies to defer VAT payments. In addition, income tax collected through PAYE is reportedly down 28% from last year. The closing of stores has caused retail sales to slump by 18% resulting in April VAT being negative (that is, the government received less in VAT than they gave back in repayments).
Lower tax revenues have forced the government to borrow the money instead. It has done this through bond sales (bonds entitle a holder to a repayment at the end of its term and regular interest payments until then), but there is a limit to how much of this it can do. In April the government borrowed £62bn to fill the gap between their tax revenue and spending. This is over £51bn more than April last year. It is the highest month of borrowing since records began, and it is almost equivalent to the amount borrowed for the entirety of the last financial year.
What's the big picture effect?
The unprecedented borrowing begins to reflect the impact of the government’s coronavirus response. The Office for Budget Responsibility has predicted that borrowing for the whole year could reach £298bn, which is more than five times the estimate made at the time of the March budget.
The result of this borrowing is that there will be an inevitable increase in taxes or large spending cuts in the coming years. This will however need to be imposed carefully in order to prevent jeopardising an economic recovery. Additionally, tax hikes will have political consequences as any party which increases taxation significantly is likely to be punished at the ballot box.
In addition, bond issues are not limited to governments, and it is likely that companies will turn to the same means to raise cash to recover their balance sheets. The other option for them is to issue further shares (equity securities), which we are seeing a lot of at the minute. Either way – law firms take on a crucial role in company bond issues so it’s good news for capital markets departments.
While the uncertainty continues, and likely will continue for some time, it is difficult to predict what the final consequences will be. These will be undeniably large, however if the government had not provided support in the way it has done then the cost to the economy and to lives could have been much worse.
Report written by Julie Lawford
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