Government Borrowing will increase to over £200 billion next year
Our February update was very much focused on the budget. Government borrowing was expected to increase to £44 billion in the current financial year. We expected borrowing to increase to around £64 billion in successive years of parliament, as a result of the giveaway budget,
The Office of Budget Responsibility forecast a deficit increasing to £67 billion within two years, national debt would increase to over £2 trillion pounds within five years. Eyebrows were raised at the extent of government largesse.
Then came the coronavirus. The government decision to lock down the economy and amputate the leisure, travel and hospitality sectors, caused shock waves to the economy.
Fears that millions of jobs could be lost, prompted the most radical intervention to stem redundancies and layoffs. Payment of wages, cash injections, VAT holidays, Interest Free Loans, Welfare Measures, an increase in universal credit, support for renters and much more, were announced by the Chancellor. Rushi Sunak made it clear the government will do whatever it takes to ease the pain, “We are all in this together” the claim.
According to the Institute of Financial Studies, “taking account of measures announced so far, and even if the economy “Only” shrinks by 5% per cent this year, we might expect borrowing in the coming financial year to exceed £175 billion, or more than 8% of national income.”
A deficit of over £200 billion in the coming financial year is well within the bounds of possibility. Plans to increase the contingency fund for the coming financial year from £10.6 billion to £266 billion suggests the government may be prepared to go even further than that.
How big will the deficit be? How much will the economy contract? There will come a stage in our analysis which will focus on the impact on the economy and borrowing. For the moment our focus is very much on modelling the virus in the U.K. and monitoring the recovery in China. Only then can we begin to understand the extent of the set back to the economy and the possible shape of recovery.
In Wuhan province, the checkpoints have been taken down, travel restrictions are eased. The city hardest hit by the epidemic is slowly returning back to normal. Elsewhere in the country, other cities have been easing control measures. China has reported no new domestic cases for over a week now. Businesses are returning to work. The economy will show signs of a rapid recovery. We can now model the outbreak and begin to understand the extent of the recovery on the mainland.
The China viral episode is marked as a twelve-week cycle, a perfectly "normal" pattern of viral distribution. The critical "quarantine" phase lasts six weeks. 95% of cases, (within two standard deviations of the norm), occur in this critical phase.
Should we be surprised by this? Not really. “Quarantina” is the Venetian word for forty days. Forty days was the period of isolation for new ships arriving at port in the 14th century. Michael Levitt, the British American Israeli biophysicist, predicted the epidemic would disappear from China by the end of March and so it has proven.
In our Covid-19 tracker we analyse the daily situation reports published by the World Health Organisation. We expected the Italian case load to peak just over a week ago and the Spanish case load to peak over the last few days. So, it has proven.
In the UK, the numbers will escalate rapidly in the days ahead but the good news, the U.K. is approximately two weeks behind Italy and just one week behind Spain. The UK case load will peak with the week if our model is correct. The worst could be over by the end of April, the all clear sirens may be heard by the beginning of June.
Boris Johnson has spoken of the twelve-week cycle. Jenny Harries, deputy chief medical officer, has suggested the case load could peak within days. Our people must be told there will be an end to this … but not just yet … for the moment, the “voluntary” lock down must continue.
About John Ashcroft
We are delighted to be partnering with Dr John Ashcroft to bring you the latest in a series of quarterly briefings and monthly updates on the UK and world economy. We will be looking at markets, growth and inflation and what this all means for the North West, the UK and globally.
Dr John Ashcroft PhD, BSC.(Econ) FRSA CBIM is author of The Saturday Economist, a weekly update on the UK and World Economy and former Chief Executive of pro-manchester, John will be collaborating with us to provide insight on economic and sector specific issues facing our clients and contacts.
