Public Finances (Feb.) - Capital Economics
UK Economics

Public Finances (Feb.)

UK Data Response
Written by Andrew Wishart

After coming in at about 2% of GDP in 2019/20, the budget deficit will soon explode to close to the size seen in the great financial crisis. The government’s measures to combat the economic fallout of the coronavirus at the same time as revenues are hit by a huge contraction in economic output is a double whammy for the public finances that will push the deficit up from 2% of GDP to at least 8% of GDP and probably higher.

Deficit will soon explode

  • After coming in at about 2% of GDP in 2019/20, the budget deficit will soon explode to close to the size seen in the great financial crisis. The government’s measures to combat the economic fallout of the coronavirus at the same time as revenues are hit by a huge contraction in economic output is a double whammy for the public finances that will push the deficit up from 2% of GDP to at least 8% of GDP and probably higher.
  • £0.3bn of borrowing in February (down from £0.6bn a year earlier) meant public sector net borrowing (ex. banks) was up 10.4% in the fiscal year to date and put the deficit on course to come in at 1.9% of GDP in 2019/20. (See Table 1.) But that pales into insignificance when compared with what is coming next.
  • The OBR forecast the deficit would rise to £54.8bn (2.4% of GDP) in 2020/21 in its Budget forecast. Since then the Chancellor has announced a £12bn package of measures on Budget day and a further £20bn thereafter to support businesses through the coronavirus crisis. That alone would push the deficit up to £87bn or 4% of GDP. At the same time, receipts will be hammered by the recession. If we are right to predict a 7% contraction in GDP this year (see here), the deficit could be a further 3.5% of GDP higher according to the OBR’s ready reckoners, leaving it at almost 8% of GDP.
  • That’s before accounting for further measures to support workers that we expect to be announced later today or any call on the government-guarantee of £300bn of loans. In the financial crisis the deficit peaked at 10.2% of GDP and we wouldn’t rule out something similar or worse this time. (See Chart 1.)
  • While gilt yields have risen recently, we think this is predominantly due to financial market stress rather than fiscal worries. The decisive action from the Bank of England so far (see here), the fact the UK can issue its own currency, and its manageable debt to GDP ratio going into the crisis mean we expect gilt yields to stay very low despite the fiscal splurge.

Chart 1: Public Sector Net Borrowing Excluding Public Sector Banks (% GDP)

Sources: Refinitiv, OBR, CE

Table 1: Public Finances (Borrowing Basis)

Total receipts

(% y/y)

Taxes on income & wealth

(% y/y)

VAT

(% y/y)

Current Total Spending

(% y/y)

Social benefits

(% y/y)

Dep. Spending

(% y/y)

PSNB ex. Public sector banks

Debt ex. Fin. Interventions

(% of GDP)

(£bn)

(Cum. £bn)

Nov.

1.3

-1.4

-0.1

-0.1

-3.0

4.0

4.9

51.1

80.4

Dec.

3.6

0.6

1.6

3.6

0.2

9.1

4.3

55.4

80.6

Jan.

3.6

4.2

1.1

3.5

3.1

6.2

-11.7

43.7

79.5

Feb.

3.0

1.1

4.8

0.4

2.2

0.9

0.3

44.0

79.1

Source: Refinitiv


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com