ALEX BRUMMER: UK swamped by debts as coronavirus bites


ALEX BRUMMER: As long as UK has credible budgetary and monetary framework it should be possible to hold back siren calls for tax increases and spending cuts until recovery is assured

Monthly borrowing figures usually can be regarded as the difference between two very large numbers – what the Government spends and what it collects in taxes – and dismissed as unreliable. 

That cannot be said about the April data, which by any standards is horrendous and highlights the exhausting cost of the furlough scheme. 

As a very temporary measure designed to protect jobs through the peak of Covid-19, the job retention plan was just about desirable. 

Money markets: The latest reckoning from the IMF is that world economic production will plunge by 7.5 per cent this year

Allowing it to linger until October is ludicrous. It is allowing 8m people to escape the reality that when the crisis is over some jobs may have vanished. 

This is not just about the loss of full-time jobs at Rolls-Royce, BA and Ryanair, and plans by pub chain Wetherspoon to employ just two full-time staff in each outlet. 

The slump and employment threat also comes from overseas. It is too easily forgotten that the UK is one of the most open economies in the world, and we cannot shield ourselves from international events. 

The latest reckoning from the IMF is that world economic production will plunge by 7.5 per cent this year because everyone, from the advanced countries to the emerging markets such as Brazil and India and the developing countries, is suffering the devastating consequences of lockdown.

Even if the UK did miraculously bounce back we would have no markets into which to sell our brilliant City, professional and creative services or aerospace engines. 

The only vestige of hope comes from big pharma such as Astrazeneca. 

The borrowing and debt numbers are humungous. Public sector borrowing in April at £62.1 billion smashes all previous records. 

On the alternative cash measure supplied by the Office for National Statistics, it reached £89 billion. The UK’s deficit is running at 17.4 per cent of total output in this financial year and debt – that is, the accumulated borrowing of the past – is at 97.7 per cent of GDP. 

This poses the question: how will it be paid for now, and over the longer haul? The short-term is relatively simple.

The Government ratchets up the sale of gilt-edged stock and the Bank of England stands ready, in the secondary market, to buy any bonds which cannot be absorbed. 

That is among the reasons why analysts speculate that the Bank will move to step up its latest bond buying programme to £300 billion (from £200 billion) next month or sometime soon. This is different from so called ‘helicopter’ money or ‘Zimbabwe’-style hyper-inflation. 

In the UK the central bank is not actually directly buying from the Government. The Bank’s intention is to sell the bonds it holds back into the market when more normal conditions prevail. Whether that will happen is conjecture. 

The longer haul is more tricky. The pressure for a more orderly budgetary process will be immense and the Institute for Fiscal Studies, an important watchdog, points out that taxes will have to rise or spending cut if the deficit and debt are to be brought down. 

Raising taxes into a recovering economy would be suicide. And Covid-19 has made it all but impossible for the Government to stint on the NHS, social care, payments such as universal credit, and education. 

A choice over the medium term, especially while interest rates are in or near negative territory, is to tolerate much higher levels of borrowing and debt than the UK is used to. This certainly works for Japan where no one worries about default in spite of a debt mountain. 

That may not please the fiscal purists. But as long as the UK has a credible budgetary and monetary framework it should be possible to hold back siren calls for tax increases and spending cuts until a pacy recovery in output and jobs is assured.

Dark knight 

Any hope that Easyjet’s founder, Sir Stelios Haji-Ioannou, might cool his war against the ‘scoundrels’ running the nofrills airline were dashed by yesterday’s virtual general meeting. 

In spite of being given a bloody nose, he alleged the result was a fix because 60m shares, owned by Invesco, 91 and Phoenix, were ‘straw men’ acting on behalf of Airbus. 

It was too much to hope that he might be a good loser and allow chief executive Johan Lundgren to get on with getting the carrier back in the skies. 

C’est la vie. 


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