Pandemic costs: UK borrowing set to rise by another £31bn
There has been a lot of chatter in recent months over the explosion in UK public debt as a result of the pandemic and the emergency measures taken by the UK government to support the economy.
“This probably goes some way to explaining the rather erratic government response to the pandemic as the innate caution of Rishi Sunak comes up against the eye-wateringly high numbers the government is spending on a month-to-month basis,” Michael Hewson, chief market analyst at CMC Markets UK, told City PM this morning.
The government borrowed £30.8bn in November, bringing the total amount borrowed for this fiscal year to £245bn, with the very real prospect that the total sum could well rise to nearly £300bn by year end as borrowing for December is expected to rise by another £31.4bn.
“While it is entirely understandable for there to be a debate about these unprecedented levels of public borrowing, one has to question whether now is the right time to do it, given that we haven’t as yet defeated the virus, as well as its various mutations, even with the vaccine program now in full swing,” Hewson said.
Same challenges
It is not as if the UK is unique in the challenges it faces, as a quick look across the English Channel or the Atlantic shows. Practically every other country in the world is facing the same “seismic issue,” as Hewson calls it, which means that if the government is sensible the sums being spent can be paid back over decades in the same way the money spent in World War 2 was repaid.
“This pandemic should be viewed through a similar lens, with the money repaid gradually over decades. It’s not as if borrowing costs are high, they are not, with bond markets fairly sanguine about the levels of borrowing taking place not only here, but all over the world,” Hewson noted.
The appetite for long term debt does appear to be there as France found out earlier this week when a 50-year bond sale got €59bn worth of bids.
“If the UK government is sensible, then getting in early could well pay dividends. The average UK gilt repayment profile is already the longest in Europe, at over 10 years,” he added.
Pound
Despite these challenges the pound has held up well, gaining across the board, hitting its highest level since April 2018 against the US dollar, helped in some part by the success of the vaccine rollout, which is raising optimism that the UK might be able to ease restrictions earlier than its peers.
“This seems somewhat premature, as any sort of easing remains some way off with the Chancellor under pressure to extend the job support, beyond April, until the middle of the summer,” Hewson observed.
For now Rishi Sunak seems reluctant to commit to this, however given the circumstances and the fact that borrowing is already off the charts, what’s another £3bn a month “between friends,” especially if you want some semblance of an economy left by the autumn, he concluded.