Navigating the Coronavirus – Part 5: What’s the cost and how will they pay for it?

June 10, 2020

To help some readers, I have included a couple of definitions for those who are not aware:

The Public Sector Net Borrowing Requirement or PSNBR is the fiscal deficit, the amount of money the government needs to borrow, to meet it’s spending commitments, the difference between what is brings in and what it spends.

Public Sector Net Debt or PSND is the amount of money the government owes in total to private organisation i.e. investors, it’s the debt of the country.

Gross Domestic Product or GDP is the broadest quantitative measure of a nation’s total economic activity. More specifically, GDP represents the monetary value of all goods and services produced within a nation’s geographic borders over a specified period of time.

What it all costs?

The vertical axis of the graph says it all: the public sector finance numbers estimated for 2020/21 are a scale of magnitude different from the pre Covid-19 era.  According to Office for National Statistics (ONS) figures:

• The OBR’s calculation is that they estimate that the public sector net borrowing requirement (PSNBR) for 2020/21 will be c. £300bn.
• The public sector net borrowing requirement (PSNBR) in April 2020 is estimated to have been £62.1bn, £51.1bn more than in April 2019 and the highest borrowing in any month since records began in January 1993.
• Borrowing in March 2020 was also infected by the virus, with an initial estimate of £3.0bn now revised up to £14.7bn. The jump was largely due to a reduction in the previous estimate of tax receipts and national insurance contributions (NICs) and provision for the first month of the Coronavirus Job Retention Scheme.

The March jump meant that borrowing for 2019/20 is now estimated to be £62.1bn against an Office for Budget Responsibility (OBR) forecast at Budget time of £54.8bn and a 2018/19 figure of £40.2bn.

Public sector net debt (PSND) at the end of April 2020 was £1,887.6bn (or 97.7% of GDP), an increase of £118.4bn (17.4%) compared with 12 months previous. The increase was the largest year-on-year rise in debt as a percentage of GDP since monthly records began in March 1993. This change is not only the result of the increase in borrowing, but also a drop in projected GDP that has been used by ONS (based on the OBR’s reference scenario).

In its commentary on the latest data, the OBR says that:

• While the £62.1bn borrowing for April was nearly £20bn above market expectations, it was £4.5bn less than the assumption in the OBR scenario.
• HMRC normally collects around 90% of all central Government cash receipts. In April 2020 the proportion was 84% (against 93% in April 2019), but more dramatically, the cash rolling into HMRC’s accounts was down by £25.8bn (42%) on 2019. That was £3.5bn worse than the OBR’s reference scenario assumption.
• April’s initial estimates of accrued spending, receipts and borrowing are likely to be heavily revised over the coming months. In part this is because some estimated data is based on the OBR’s reference scenario or other forecasts which may prove to be wrong. For example, the current data will contain assumptions about how much of the tax that has been deferred will eventually be paid.

The cost of the Self-Employment Income Support Scheme (SEISS) has not yet been incorporated in the borrowing figures. However, the OBR notes that by 17 May, two million claims had been made at a cost of £6.1bn.

These numbers show the first impact of Covid-19 on the Government’s finances. They need to be treated with caution at this early stage, as the OBR stresses. However, regardless of future adjustments, they help explain the weekend press reports that the Treasury is anxious to accelerate the reopening of the economy.

How will they pay this?

The huge cost of the Covid-19 measures will initially be met by borrowing and that will be almost entirely in the form of gilt sales.

The Bank of England, very large pension schemes, life assurance annuity providers and sovereign wealth funds lend money to the British government in return of a very modest, negatively real, interest payment.  This is known as a gilt (A Gilt/Golden edged government security).

The end result will be that the British government’s Public Sector Net Debt (PSND) cumulative borrowing to date will be around £2,230bn by next March. As a proportion of the size of the UK economy, that is not far short of 100%!