Rishi Sunak – double centurion. Howzat?
The cricket season may only now be slowly getting underway, but May saw the Chancellor score two centuries which, in different times, would have deeply worried investors.
Every month the Office for National Statistics (ONS) publishes a detailed summary of the public sector finances, showing how much the public sector has spent and how much income (mostly taxes) it has received in the preceding month. It is the sort of data that interests the more investment-oriented economists, but few others.
May’s data was somewhat different and received national headlines. It showed the stark impact of the two months of the Covid-19 pandemic and the government’s wide-ranging ‘whatever-it-takes’ response:
The first of those centuries is tied to government borrowing. In the first two months of the 2020/21 financial year, the estimated figure stands at £103.7bn. To put that eye-watering number into perspective, it is six times the amount borrowed in the same period last year and the highest amount for any April/May period since ONS monthly records began in 1993. In terms of tax, £103.7bn is almost equal to the total amount of VAT the government is projected to collect in 2020/21.
If £103.7bn sounds like a millstone, then it is nothing – well, about 5% – compared with the government’s total debt, that is, its accumulated borrowing over many years. In May that reached £1,950.1bn (the £0.1 billions still count). That figure produced the second century because it was equal to 100.9% of the UK’s gross domestic product (GDP).
In other words, the UK’s debt was just slightly bigger than a year’s worth of the country’s entire output. The last time the 100% barrier was breached was in 1963, when the government was still in the business of paying down the debt it had incurred in the Second World War.
It sounds grim and will get worse, but at least for now the interest on all that debt is affordable. The government currently can borrow for 30 years at a fixed rate of about 0.7% and over 10 years at just 0.25%. If interest rates were to start rising, that is when the problems could begin, so HM Treasury will want to reduce the overall level of debt over time. And it will probably be a long, long time. Taxes will rise and manifesto promises may fall by the wayside. Some tax shelters could be watered down, as happened with entrepreneurs’ relief (now business asset disposal relief) in March, or even disappear.
We should learn more in the Autumn Budget. Meanwhile some pre-Budget tax planning could be a wise precaution.
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