The UK’s Covid-19 deficit mountain could be tens of billions higher than previously feared after a fresh surge in borrowing to foot the bill for the crisis, experts warn.
The worse than expected £55.2bn surge in the deficit for May takes borrowing for the first two months of the financial year alone to a staggering £103.7bn, and pushes the nation’s debt as a share of the overall economy above 100pc for the first time since 1963.
The dire numbers are likely to increase pressure on ministers to reopen an economy hampered by social distancing. The price of the immense support for the UK economy, including the job retention scheme protecting 9.1m jobs, has been put at £132bn so far by the Government’s fiscal watchdog, the Office for Budget Responsibility.
But the deficit could surge well past the OBR’s £298bn forecast for the full financial year, according to Capital Economics’ chief economist Paul Dales.
The consultant forecasts a deficit of at least £330bn - or around 17pc of GDP - in 2021, but Mr Dales also warned of the lingering drag of high unemployment on the deficit next year when support schemes are wound down.
“The worst is yet to come for the labour market and the public finances,” he said. The EY Item Club predicted borrowing of £320bn and warned “it could well exceed this level”.
The £55.2bn surge in May alone is almost as much as the £56.6bn borrowed by the Treasury over the entirety of 2019/20. George Buckley, UK chief economist at Nomura, said: “The monthly deficits are coming in around the level of what the OBR had, at the time of the Budget, expected for the entire fiscal year.”
Although April’s borrowing was revised lower to £48.5bn, the scale of the impact of the outbreak on the Treasury’s coffers was laid bare in the figures.
Government receipts plunged 28.4pc in May alone to £40.7bn as the tax take tumbled, including a 46pc slump in VAT. But government spending was ratcheted up hugely by 50pc to £91.6bn compared to 12 months earlier, largely accounted for by a huge £20bn in subsidies including £10.5bn in furlough payments and £6.8bn in support payouts for self-employed workers.
The UK's debt pile of £1.95 trillion meanwhile is up £173.2bn or 20.5pc in a single year, the biggest annual increase since records began according to the Office for National Statistics.
But despite the rise, debt interest payments only crept up by £200m to £3.3bn. HSBC’s senior UK economist Liz Martins said: “As long as borrowing costs remain low, it should be sustainable. But the last time debt was this high was in 1963, when the UK was in the midst of a decade in which nominal GDP growth would average 7.4pc, allowing debt to fall. It is not at all clear the UK can pull off the same trick this time.”
The dire borrowing figures came as the Institute for Fiscal Studies warned that lingering weakness in the economy could leave a £130bn black hole in the public finances as late as 2024-25.
The influential think tank warned that Mr Sunak would need to find up to £40bn of tax hikes or spending cuts to stabilise debt levels at 100pc of GDP after a record borrowing binge to tackle Covid-19.
Chancellor Rishi Sunak said: “Today’s figures confirm that coronavirus is having a severe impact on our public finances. The best way to restore our public finances to a more sustainable footing is to safely reopen our economy so people can return to work.”