Britain sees budget deficit at highest due to virus since ’46

Britain has seen its budget deficit rise during the coronavirus pandemic to its highest level since the year after the end of World War II, official figures showed on Friday.

The Office for National Statistics said public sector net borrowing - the official gauge of the difference between the government’s spending and taxes - reached 303.1 billion pounds ($420 billion) in the financial year to end-March. This was equivalent to 14.5% of the country’s annual gross domestic product, the highest level since 1946, when the deficit hit 15.2% of GDP.

The causes of the spike are simple. While tax receipts have ebbed as a result of the deepest recession in more than 300 years, the government has splashed out billions of pounds trying to prop up the economy and jobs since the pandemic first struck more than a year ago. Notably, it has been covering the lion’s share of the salaries of people unable to work during the country’s many lockdowns and providing further support to hard-hit businesses.

The scale of the borrowing the government has undertaken in the wake of the pandemic is evident in the size of the increase in the deficit from 57 billion pounds in the previous financial year.

“The increase on the pre-pandemic forecast is unprecedented and highlights the extraordinary impact of the pandemic on government revenues and spending,” said Isabel Stockton, research Economist at the well-respected Institute for Fiscal Studies. Stockton thinks the actual deficit will end up being higher, “perhaps quite significantly,” as many businesses won’t be able to repay government-backed loans.

In the post-war era the deficit peaked in the aftermath of the 2008 financial crisis, hitting around 10% of GDP. The average deficit since 1970 has been 3.4% of GDP.

The borrowing undertaken by the government has pushed public sector net debt up to 2,142 billion pounds, which is 97.7% of Britain’s GDP. This is the highest proportion since the early 1960s.

Because interest rates are low historically, the government doesn’t have much of a problem managing its debt, but economists worry that higher borrowing rates in coming years may create problems in the future.

The government is hoping that the economy, which shrank by nearly 10% during 2020, will recover strongly through the spring and summer as lockdown restrictions are eased in the wake of the sharp fall in coronavirus cases, and amid the rapid rollout of vaccines.

Sterling rebounded on Friday from a sharp fall on Thursday after strong retail sales data and business surveys showed Britain’s economy might already be recovering from its worst annual contraction in 300 years.

British retail sales rocketed last month as consumers prepared for a partial lifting of coronavirus lockdown restrictions, according to official data that also showed record peacetime government borrowing.

Sales volumes leapt by 5.4% in March from February, the Office for National Statistics said. Economists polled by Reuters had expected an increase of 1.5%.

On top of retail sales, a survey showed a deluge of orders swept through British businesses in April as the country lifted some of its restrictions, pointing to a rapid rebound for the pandemic-hit economy.

The preliminary “flash” reading of the UK Composite Purchasing Managers’ Index (PMI) rose to 60.0 in April from 56.4 in March, its highest reading since November 2013. A Reuters poll of economists had pointed to a smaller rise to 58.2.

After having erased its gains this week on Thursday, the pound was once again set for a weekly gain on Friday, trading 0.3% higher on the day at $1.3878 by 1055 GMT.

Against the euro, sterling was flat at 86.86 pence , above its lowest levels in almost a week against single currency.

“Strong PMI data is more evident in the FX markets where both the pound and the euro are capitalising on the weaker U.S. dollar,” said Sophie Griffiths, market analyst, UK & EMEA at OANDA. “Better-than-expected retail sales data is also underpinning the pound.”

There was other bright news. British consumer sentiment rose to its highest since the start of the COVID pandemic this month, a closely watched survey showed on Friday, but the increase was smaller than economists had expected.

British manufacturers’ hopes for an economic rebound rose to their strongest in 48 years this month as the country began to recover.

“Many positives are in the price of the pound and this is reflected in market positioning as well as FX valuation,” said Valentin Marinov, head of G10 FX research at Credit Agricole.

“There has been little focus on downside risks like the loss of the GBP vaccine advantage in recent weeks, the May 6 Scottish elections, as well as the potential for a renewed weakness of global risk sentiment in May and June because of a renewed spike in UST yields on the back of strong US data.”

This suggests the risks for sterling/dollar are on the downside in coming weeks, Marinov said.

Speculators’ net long position on the pound versus the dollar rebounded in the week to April 13 after slipping to its lowest since February in the previous week, futures data from the CFTC showed.