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
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Vietnam: a high-growth market going cheapOpinion The threat of tariffs has shaken Vietnamese stocks, but long-term prospects remain solid, says Max King
-
Who’s driving Tesla?As Elon Musk steps back from government with his eyes on the stars, investors ask if he’s still behind the wheel at his electric-car maker.
-
UK wages grow at a record paceThe latest UK wages data will add pressure on the BoE to push interest rates even higher.
-
Trapped in a time of zombie governmentIt’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
-
America is in deep denial over debtThe downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
-
UK economy avoids stagnation with surprise growthGross domestic product increased by 0.2% in the second quarter and by 0.5% in June
-
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
-
UK inflation remains at 8.7% ‒ what it means for your moneyInflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
VICE bankruptcy: how did it happen?Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
-
Would a food price cap actually work?Analysis The government is discussing plans to cap the prices of essentials. But could this intervention do more harm than good?
