UK public debt tops £2tn for first time following Covid-19 spending boom

The coronavirus pandemic has severely undermined Britain’s public finances, with government debt topping £2bn for the first time and borrowing at its highest level in peacetime.

The Office for National Statistics reported on Friday that public sector net debt rose a further £20.2bn to £2.004bn in July. It is now greater than the annual value of goods and services produced in the UK.

Although the monthly borrowing rate has been described by Ruth Gregory, senior UK economist at consultancy Capital Economics, as “another huge sum”, it is lower than expected by the Office for Budget Responsibility, the fiscal watchdog, with better signs that expected consumer spending is supporting some tax revenue.

Chancellor Rishi Sunak used the debt rise to over £2bn to issue a warning that the government’s extraordinary support for the economy must be time-limited. “Today’s figures are a stark reminder that we need to get our public finances back on a sustainable basis over time, which will require tough decisions,” he said.

The best measure of the deficit was still at a very high level in July. The central government’s net cash requirement, the amount of cash it had to raise to fund its activities, during the month was £25.5bn. This deteriorated by £33.6billion from the same month a year ago when the government recorded a surplus in July.

Since the beginning of the financial year in April, cash requirements have reached £199.5bn, a figure higher than the worst previous year, in 2009/10. But the level of recorded borrowing is nearly £30bn lower than forecast by the OBR, which has estimated the government will borrow more than £370bn in the 2020/21 financial year.

Samuel Tombs, a British economist at consultancy Pantheon Macroeconomics, said the deficit was still on course to hit its highest level as a percentage of national income since World War II, but there had been unexpected silver linings in public finance figures.

“The better-than-expected figures are largely due to the resilience of value added tax revenue – partly thanks to recent strength in retail sales – which came in at £13.3bn in July, well above the OBR’s £9 billion expectation,” he said.

Howard Archer, chief economic adviser at the EY Item Club, said the figures provided evidence of a continued rebound in economic activity. “July’s decline in the deficit reinforces the belief that the economy likely saw another marked improvement in the month,” he said.

In the first four months of the fiscal year, cash receipts paid to the public treasury decreased by 29.4% compared to the same months in 2019-2020, while central government cash expenditure increased by 54, 3% compared to the same period last year.

The resulting central government net cash requirement is £199.5bn over four months, compared to a cash shortfall of just £10.3bn at the same time in 2019-20.

In the coming months, there will likely be significant revisions to public finance figures as the government determines what it has spent and how much money it has raised.

The ONS will have to adjust borrowing figures upwards to account for expected taxpayer losses on billions of pounds of business loans backed by government guarantees. It will also need to adjust tax and expenditure data to reflect many temporary changes in payment deadlines, such as the VAT deferral regime.