LONDON (Reuters) - Britain’s government is on track to borrow a record 298 billion pounds ($364 billion) this year, equivalent to more than 15% of economic output, to cope with the economic damage being caused by the coronavirus.
The Office for Budget Responsibility raised its forecast for public borrowing on Thursday by 25 billion pounds from April’s 273 billion-pound estimate, which already represented a five-fold jump from its pre-lockdown prediction of 55 billion pounds.
Government borrowing looks set to far outstrip the peak caused by the 2008-09 financial crisis, when the Conservative Party that is now in office accused the Labour government of fiscal mismanagement for letting the deficit reach 10% of GDP.
Like many other countries around the world, Britain is now spending heavily to mitigate the effect of the coronavirus and the associated lockdown. But even before the crisis, Prime Minister Boris Johnson showed far less appetite for fiscal restraint than his predecessors.
Thursday’s estimate does not include the full cost of the government’s most expensive measure, a wage-support scheme that finance minister Rishi Sunak has extended until the end of October.
The government is now paying 80% of the wages of 7.5 million workers who have been put on temporary leave by their employers.
The OBR said this would cost 50 billion pounds until the end of July, after taking into account income taxes on the wages that will be paid back to the government.
Its borrowing forecasts do not include the cost after that, as the government has said it expects businesses to contribute an as-yet unspecified share.
If businesses pay 50% of the cost, the scheme would cost the government an extra 21 billion pounds, the OBR said.
On Tuesday, the Daily Telegraph newspaper reported that finance ministry officials had told Sunak the budget deficit could hit 337 billion pounds this year, assuming a relatively rapid recovery after the lockdown ends.
Although the deficit was predicted to fall swiftly afterwards, due to the end of emergency economic support, the officials advised that a further 25 billion to 30 billion pounds of tax rises or spending cuts could be needed to stabilise debt levels, the newspaper quoted the officials as saying.
Thursday’s OBR forecasts showed public debt rising to 95.8% of GDP for 2020/21 from 77.4% in 2019/20.
Many economists judge Britain cut public spending too fast after the last financial crisis, when the government feared the kind of backlash in financial markets suffered by Greece, Spain and Italy.
The picture looks very different now with government borrowing costs near record lows. Bank of England Governor Andrew Bailey said on Wednesday that the cost of increased public borrowing could be spread over time.
“We have choices there, and we need to exercise those choices,” he told broadcaster ITV.
The central bank is buying an extra 200 billion pounds of government bonds to boost the economy. Britain’s government this week paid an interest rate under 0.4% for 12 billion pounds of new 10-year borrowing, compared with around 4% a decade ago.
Sunak said this week it was too soon to talk about the future shape of fiscal policy, after official figures showed the economy had shrunk 6% in March alone.
Reporting by David Milliken, editing by Larry King