UK's Ballooning Debt: Expect the Government's Thirst for Cash to Start Fading from Here

- UK debt as a proportion of GDP breaches 100%
- Govt. scrambles for cash to pay for covid hit
- But, cash requirement to start easing says economist

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The UK's debt at the end of May 2020 was 100.9% of gross domestic product (GDP), the first time that debt as a percentage of GDP has exceeded 100% since the financial year ending March 1963, says the ONS.

The surge in debt comes as the government scrambles for cash to pay for the various schemes it put in place to mitigate the impact of the covid-19 crisis, a situation that should however start easing over coming weeks and months we are told.

The country's Public Sector Net Debt, excluding public sector banks, at the end of May 2020 stood at £1,950.1BN, an increase of £173.2BN (or 20.5%) compared with May 2019, the largest year-on-year increase in debt as a percentage of GDP on record (monthly records began in March 1993).

The government borrowed £55.2BN in May alone.

"Emergency measures to prevent the sudden collapse in economic activity triggering a tsunami of corporate collapses and loan defaults have placed a colossal burden on the public finances," says Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics. "The ONS continues to argue that the central government net cash requirement, and not the main measure of borrowing, gives the best steer currently on the hit to the public finances."

Image courtesy of Pantheon Macroeconomics

The government net cash requirement (excluding UK Asset Resolution Ltd, Network Rail and the COVID Corporate Financing Facility) in May 2020 was £62.7BN, £46.1BN more than in May 2019, which makes for the highest cash requirement in any May on record (records began in 1984).

According to Tombs, the net cash requirement (CGNCR) is a better indicator on the current surge in spending on the coronacrisis as it is based on actual receipts and outlays when they occur, rather than estimates of accrued receipts and expenditure which partly depend on forecasts and which often are revised considerably.

Indeed, borrowing in April and March 2020 was revised down by a massive £13.6BN and £7.2BN respectively, mainly due to an upward revision of tax receipts.

Therefore, what happens to the CGNCR over coming weeks and months will give a steer as to just how large the country's debt balloon will be once it emerges from the crisis.

"Looking ahead, the CGNCR should decline over the coming months, now that Covid grants to SMEs have been paid out and the CJRS is closed to new joiners and will be fully wound down by October," says Tombs.

Image courtesy of Pantheon Macroeconomics

The economist says tax receipts will pick up as GDP recovers too.

"Nonetheless, the Treasury’s demand for cash will remain high by past standards, given the prospect of rising unemployment and the likelihood that the Chancellor will attempt to reinforce the recovery with a stimulative Budget later this year," says Tombs.

Thomas Pugh, UK Economist at Capital Economics says while the government may not have to borrow quite as much in the coming months, he still expects borrowing to total £330BN (17.0% of GDP) in 2020/21, over £30BN more than the OBR’s forecast.

"Even so, against the backdrop of low interest rates higher levels of government debt will be manageable. As a result, a prolonged period of austerity won’t necessarily follow this crisis," says Pugh.

The background of low interest rates is underpinned by the significant intervention in financial markets by the Bank of England, which on Thursday expanded the amount of government debt it intends to buy by £100BN.

This strong demand for debt means the yield paid by the government to borrowers remains low, indeed we have seen some short-term issuances of debt pay negative yields.

But, the Bank expects to run through its current envelope of spending by year-end, which means it will slow the purchases of debt it intends to make. This could in turn push the cost of borrowing higher once more, unless another tranche of quantitative easing is announced, which many economists say is most likely.