British finance minister Rishi Sunak will announce the heaviest public borrowing since World War II when he spells out his spending plans next week after the biggest economic crash in over 300 years.
With Britain in the midst of a second wave of Covid-19 cases and economic recovery on hold, Sunak has postponed longer-term plans for the public finances.
Spending on the pandemic is on track to exceed 200 billion pounds ($265 billion) this year after the extension of job protection programs, and other costs are likely to spill into the 2021/22 fiscal year.
Only the armed forces will receive a multi-year increase in funding as Prime Minister Boris Johnson seeks to boost Britain’s profile outside the European Union.
Sunak’s other spending announcements on Wednesday are likely to be dwarfed by the scale of new borrowing forecasts which will underscore the need for future tax rises.
“Events next week might… prove an important prelude for a pivot to a tighter fiscal approach in the spring budget,” economists at Citi said in a note to clients.
As Sunak starts to look for ways to begin reining in the huge surge in borrowing, media reported that he plans to freeze pay for public-sector workers other than health staff.
Prime Minister Boris Johnson has refused to commit to maintaining spending on overseas aid.
Britain’s economy shrank by 20% between April and June, more than any other major economy, and it has been slower to recover.
The Bank of England has penciled in an 11% fall in GDP for 2020, a drop last seen in 1709.
Government borrowing this financial year is likely to be around 400 billion pounds, according to Citi, while HSBC has forecast 365 billion pounds.
This is equivalent to between 17% and 20% of GDP, well above its 10% peak at the height of the global financial crisis.
Data published on Friday showed 215 billion pounds of borrowing in just the first seven months of this financial year, nearly five times more than at the same point in 2019.
This is likely to fall as emergency pandemic spending is scaled back but HSBC expects it will be a still unsustainable 8.5% of GDP in 2021/22.
Citi predict an extra 800 billion pounds of borrowing over the next five years, compared with forecasts in March.
Tax rises
Sunak has warned of hard decisions ahead to get the public finances “on a sustainable path” over time.
Big spending cuts are less likely than after the financial crisis because public service have undergone a decade-long squeeze and pressures from an ageing population are growing.
The scale of any tax rises will not become clear until the economy is on a more even keel.
The Resolution Foundation think tank says tax rises raising 40 billion pounds a year will be needed before the 2024 election just to stabilize the public finances and fund social care.
For now financial markets are happy to fund the borrowing at almost record low interest rates. Britain’s Debt Management Office will publish bond sale plans on Wednesday.
HSBC sees a further 100 billion pounds of gilt issuance this financial year, taking the total to a record 480 billion pounds, and up to 300 billion pounds more in 2021/22.
The government will also publish a delayed review on when to phase out the RPI measure of inflation used to calculate payments on inflation-linked bonds, which now overstates price rises.
