Paying for it – how to fund a budget deficit of £350 billion?

Economic commentary

Key points

• The UK government is on track to post a budget deficit of around £350 billion in the current fiscal year. Yet at the same time, it is able to raise money in the bond markets more cheaply than ever before.
• Once the Covid crisis has passed, borrowing costs will inevitably rise. So, while running a huge deficit this year is not a problem, the Government will need to get a grip on the public finances during the next few years.
• If the economy doesn’t get back on to its pre-Covid growth track, the Government will face tough fiscal choices. There seems little appetite for a second round of austerity, which implies that tax rises would be needed.

The British government, like many others around the world, is running its biggest ever peacetime deficit. Yet it is also raising money from the bond markets more cheaply than ever. Does this mean that there is no longer any need for fiscal discipline? Is there really a magic money tree of the kind that will just keep on giving, and giving? Or, on the other hand, are we just burdening future generations with even more debt, and won’t there be, at some point, an awful day of reckoning?

Rishi Sunak’s latest fiscal statement, delivered on 8th July, brought the total amount disbursed during the Covid crisis to a staggering £190 billion. He is perhaps the only Chancellor of the Exchequer who has spent more in the footnotes to his statement (£33 billion) than he did in the statement itself (£30 billion). When the Institute for Fiscal Studies (IFS) ran its customary slide-rule over the Chancellor’s arithmetic the following day, they forecast a budget deficit for the current fiscal year of around £350 billion.

Indeed, since the crisis blew up in March, the government has been running bigger deficits in a month than it would usually rack up in a year, with its cash requirement coming in at an eye-watering £174 billion in the period from April to June. The shortfalls are now thankfully starting to come down, with June’s cash requirement being a somewhat more modest £47.1 billion.