The UK government borrowed an eye-watering £303bn in the year to March as the pandemic created a massive hole in the government’s finances. Government net borrowing now stands at 14.5% of UK GDP. The last time it was anywhere this high was in 1946 when it hit 15.2%, after running up debts to fight the Second World War. The result is that the UK’s public sector net debt, commonly known as the fiscal deficit, is now 97.7% of GDP.
The furlough scheme and other measures taken to help the economy stay afloat during the pandemic have hit public finances badly. But along with higher spending, the pandemic has also hit tax revenues: the unemployed or furloughed pay lower income tax, and businesses who suffered a slump in profits also pay less in tax.
Borrowing will continue this year, as many job assistance programmes will continue until at least October, says the BBC’s Faisal Islam. And the government will gain a clearer picture in coming months of the scale of losses on some covid loans to businesses.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Debt is high – but it’s not all bad news
But it5’s not all bad news. Borrowing, though high, fell short of analysts’ predictions – they had expected UK government spending to hit £400bn this March. That prompted the UK to cut back its plans to sell bonds as it doesn’t need as much cash as it thought it did. The Debt Management Office will now issue £252.6bn of gilts for the year 2021-2022 – £43.4bn less than previously expected.
And there was positive news from the UK’s retail sales, too, which rose 5.4% in March, even before the country opened its doors to hospitality and reopened shops and outdoor dining on 12 April.
Why does any of this matter for investors? It signals the UK may have a stronger recovery from the pandemic than the market expects. "If we are right in thinking the economic recovery will be faster and fuller than the OBR anticipates, borrowing will probably fall more quickly than most expect,” says Ruth Gregory, senior economist at Capital Economics.
Investors should also bear in mind that a stronger economic recovery will boost inflation. That in turn could reduce the value of debt, if wages rise in line with inflation.
The UK’s debt pile decreased as a percentage of GDP each year between 1947 and 1974 even though “we only paid back more than we borrowed during seven of those years,” points out the Evening Standard. But given the government is selling more than £40bn fewer gilts next year, this could also put a cap on inflation.
All this is in theory, of course. Whether that happens in practice will be interesting to see. But a slew of data suggests the UK is poised for strong economic growth.
Analysts at Capital Economics expect UK GDP to be 3.7% higher than pre-covid levels by the end of 2022. This is higher than European rivals, who suffered a lower contraction last year than the UK economy which slumped by 10% in 2020.
So for now investors needn’t worry too much about the UK’s debt pile. Expectations of a stronger recovery will boost value stocks that have underperformed in the last decade in favour of growth stocks that are looking increasingly expensive.
Saloni is a web writer for MoneyWeek focusing on personal finance and global financial markets. Her work has appeared in FTAdviser (part of the Financial Times), Business Insider and City A.M, among other publications. She holds a masters in international journalism from City, University of London.
Follow her on Twitter at @sardana_saloni
House prices are falling in London but how does it compare to the rest of the UK?
Advice The capital remains the most expensive part of the UK to buy a property, but it isn’t being as badly hit by the housing market slump. Where are London house prices heading?
By Marc Shoffman Published
Will a Santa Rally provide festive cheer for investors this year?
News Equities often get a seasonal boost during December - will there be a Santa Rally in 2023?
By Marc Shoffman Published
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published