UK government reveals true impact of COVID-19 as national debt hits £2tn for first time

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Today, the UK government have announced that national debt has risen to more than £2tn for the first time in more than 50 years, primarily caused by the heavy spending that has been used to support the economy and jobs market during the COVID-19 pandemic and subsequent lockdown.

Total debt for the UK hit £2.004tn in July – £227.6bn more than the same month last year, according to the Office for National Statistics (ONS) – with the furlough scheme one of many initiatives being blamed for the sharp rise in debt.

Today’s news marks the first time in history that national debt has been above 100% of gross domestic product (GDP) since the 1961 financial crisis. It also marked the fourth-highest level of borrowing in any month since records began in 1993.

Perhaps more worrying for the government and business community, is the fact that the three higher figures were the previous three months – during the height of the lockdown pandemic.

Ruth Gregory, Senior UK Economist at Capital Economics said: “The £26.7bn the government borrowed in July was the lowest monthly borrowing figure since March as fiscal support started to unwind. Nonetheless, it is another huge sum and pushes borrowing in the year to date to £150.5bn. That is close to the deficit for the whole of 2009-10 of £158.3bn, which was previously the largest cash deficit in history, reflecting the extraordinary fiscal support the government has put in place to see the economy through the crisis.”

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, said: “Public borrowing remains on course this year to hit its highest share of GDP since the Second World War, despite coming in below expectations over the last couple of months. Looking ahead, borrowing looks set to jump temporarily in August, as the government makes the second and last Self-Employment Income Support Scheme payment and funds the Eat Out to Help Out scheme.

“Thereafter, it will decline, as the Coronavirus Job Retention Scheme, which cost £6.9bn to operate in July, is wound down ahead of its closure at the end of October, and firms make a huge VAT payment in March, for sales generated in Q2, as well as in that month.”

Industry reaction

Andrew Harding, FCMA, CGMA, Chief Executive — Management Accounting, The Chartered Institute of Management Accountants, part of the Association of International Certified Professional Accountants

The UK national debt has reached £2tn as government spending hit an all-time high amid the COVID-19 crisis. Ordinarily this would ring alarm bells, but now is the time for the government to be bullish and invest for long-term economic benefits.

With interest rates at an all-time historic low, the cost of servicing government debts is lower than initially predicted meaning that it can currently increase its spending at an incredibly low cost. The government should take advantage of the situation to borrow for long-term financial return and tackle systemic challenges in the economy. The government would, for example, do well to:

  • proactively supporting SMEs to seize new opportunities notably through the creation of a Growth Accelerator scheme;
  • reforming UK insolvency and administration practices to build confidence and foster an environment for entrepreneurial risk taking;
  • changing the Apprenticeship Levy to an Apprenticeship and Skills Levy and introducing a rebuttable right to retrain to transform productivity and drive growth;
  • investing in green infrastructure supporting a net-zero recovery and future business sustainability; and
  • investing in infrastructure projects that will support business growth and productivity such as faster broadband and better road and rail infrastructure.

If the government uses this unusual situation in the right way, it can certainly turn the challenge into an opportunity.

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