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Record borrowing piles pressure on Chancellor

Russell Lynch
·3-min read

The scale of the financial challenge facing Rishi Sunak was underlined on Friday as the deficit hit a record £173.7bn in the first five months of the financial year.

The stark figures come a day after the Chancellor drastically reduced generous support schemes for the fragile labour market from November.

Economists fear the deficit could even top £400bn for the full year - almost 20pc of GDP - if the current trend continued. 

The huge sum for the April to August period already exceeds the £158bn Britain borrowed after the financial crisis in the whole of 2009/10 as the Treasury’s coffers creak under the cost of emergency measures to fight Covid-19.

August borrowing alone hit £35.9bn - the third biggest month on record - while the UK’s debt pile climbed to £2.02trln - £249.5bn higher than a year earlier.

“Were this pace of deterioration to persist over the entire fiscal year, it would imply a deficit of £408bn,” said Investec chief economist Philip Shaw.

Borrowing ballooned due to £10.8bn in payments under the furlough scheme as well as income support for the self-employed and health spending, while tax revenues collapsed.

The Chancellor’s much less generous successor to the furlough scheme from November is estimated to cost £300m per million workers, but economists and employers fear it will not be enough to stave off a sharp rise in unemployment.

The gradual closing of Mr Sunak’s crisis chequebook is also likely to be felt alongside the impact of the latest restrictions on the economy to fight off a second wave as the recovery slows.

Christian Schulz, UK economist at Citigroup, said: “With widespread support being dialled down, and the government seemingly shying away from any wider stimulus, this could risk a weaker recovery – potentially adding to borrowing from 2021 onwards.”

Between April and August, the impact of the Covid lockdown triggered a 13.4pc slump in tax receipts and national insurance payments compared to 2019 while government spending has soared by more than a third.

In August, the Chancellor’s Eat Out To Help Out dining discount scheme added £500m to the deficit but also contributed to a £3.7bn fall in VAT takings compared to last year. The stamp duty holiday also cost £500m in lost receipts despite a mini-housing boom.

The surge in borrowing has pushed the national debt to 102pc of GDP, the highest since the 1960s, but so far the Bank of England’s bond-buying efforts has kept borrowing costs at record lows.

The UK paid just £3.6bn in debt interest costs in August although Mr Sunak has said the public finances will have to be returned to a sustainable footing once the crisis is over, potentially through tax rises.

Economists also warned that with inflation close to zero, the Chancellor does not have the option of inflating away the debt pile. 

Mr Shaw added: “Mr Sunak will have difficult decisions to make on fiscal policy. With the focus currently on trying to maintain the recovery, this is not the time. However if the economy can successfully transition away from life-support measures, fiscal sustainability may become a live issue once again next spring.”