The enormous shock that a year of COVID restrictions combined with economic interventions have caused to the UK economy have resulted in a projected deficit of over £300bn – nearly 15% of GDPR for the financial year that ended on March 31st.
The ONS has recently published its initial estimate for the UK’s financial year, predicting a deficit of £303bn and an additional £344bn increase in public sector debt; leaving the UK owing £2.14tn – which is a new record for peacetime debt.
The official forecast presented by the Chancellor, by comparison, stands at £55bn. A significant difference.
However, the deficit is a lot smaller than the forecast made by the Office for Budget Responsibility (OBR), in November. At that point, they forecast a deficit of £394bn.
Furthermore, due to the government’s borrowing to finance tax deferrals and lending to businesses, public sector net debt stands at c.97% of GDP and is expected to rise over the next couple of years to c. £2.5tn
Although the numbers for both the deficit and net debt are likely to be revised over the next couple of months, the general picture is very unlikely to change – debt as a percentage of GDP has risen from 35% in March 2008 prior to the financial crisis, to around 100% of GDP now.
On the bright side, interest rates are coming down even faster than debt is rising, which is allowing the government to reduce its interest bill.
Alison Ring, ICAEW Public Sector Director, said: “Today’s numbers cap a dramatic year for the UK’s public finances, and show this is the biggest deficit since the end of World War Two. However, the damage is less than had been feared, with the shortfall lower than the OBR had forecast.
“Ultra-low borrowing costs have provided the government with the room it needed to provide unprecedented spending to tackle the coronavirus pandemic, protect jobs and prevent the economy from crashing, as well as the opportunity to invest for growth in the coming years.
“However, even as the economy starts to recover, the legacy of higher debt and a greater exposure to changes in interest rates will be with us for years, if not decades to come. The public finances were already on an unsustainable path before the pandemic, and the government will need a long-term strategy for rebuilding them.”
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