UK borrowing on course to exceed £1bn a day but markets unperturbed

Halfway through the 2020-21 financial year the question is not whether the UK deficit is on course for a peacetime high but by just how much the previous record will be broken. By some distance, is the answer.

The bare figures are as follows. In September alone the government ran a deficit of £36bn, a sum that it would expect to rack up in an entire year in normal times. For the first six months of the year, borrowing totalled £208bn.

UK government borrowing rises to £36bn in September and inflation picks up – business live

There have been three big recent developments. First, the chancellor has announced plans to see the economy through the winter. Rishi Sunak’s winter economic plan extended the VAT cut for hospitality, replaced the furlough with the job support scheme and announced more money for public services.

Second, the recovery in the economy is losing momentum. Weaker growth means lower tax receipts and higher welfare spending.

Finally, the surge in the number of Covid-19 cases has led to the imposition of local lockdowns, which will intensify the slowdown.

Borrowing figures from the Office for National Statistics were accompanied by a statement from the Treasury announcing that plans for a multiyear spending review have been ditched in favour of a one-year settlement. The message is clear. Firefighting will be the priority this winter: the government’s long-term economic agenda will have to wait.

During the financial crisis of 2008-09, public borrowing soared to more than £150bn – or just under 11% of national output at the time. Paul Dales at Capital Economics says the final total for 2020-21 could be £390b, almost 20% of GDP. As things stand, that looks a reasonable estimate.

In that context, Whitehall may struggle to explain why it has taken such a tough line in its negotiations with Greater Manchester over a tier 3 support package, with the two sides wrangling about £5m. When borrowing is on course to exceed £1bn a day, £5m is a drop in the ocean.

The one piece of good news for the government is that the financial markets don’t seem to care one bit about the deficit. The yield – or interest rate – on 10-year UK gilts is about 0.2%, below the current inflation rate of 0.5%.

A nagging concern for the Treasury is that the markets will have a change of heart and make it more expensive for the government to fund its deficit. For now, though, there is no sign of that happening.

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