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COVID pushes public sector borrowing to all-time high


Recent reports from the Office for National Statistics show that peacetime borrowing has hit a record high of £303.1 billion in the financial year of 2020/21.

This marks the highest total borrowing since 1947, and, the borrowing figure is predicted to increase to £355 billion, the Office for Budget Responsibility.


Overall, borrowing has increased by £250 billion compared to that of last years, and, the government's debt has accumulated to a total of £2.4 trillion.


The large influx of borrowing is obviously a direct result of the COVID-19 Pandemic which has required the government to overspend in an effort to drive economic growth.


This is because, during periods of recession, economic agents such as consumers and businesses tend to cut back on spending, for this reason, the government has to increase spending to ensure aggregate demand does not fall too much.


However, because consumer spending and business investment make such a large amount of the economy, 66% and 18% respectively, the governments budget itself simply cannot account for the loss in spending.


Therefore, in an attempt to keep aggregate demand at an optimal level, the UK government has been forced to overspend its budget.


A lot of this fiscal spending has been attributed to the Furlough Scheme, a job retention scheme designed specifically to keep workers employed by subsidising 80% of their wages.


The scheme has helped maintain the living standards of vulnerable individuals during the COVID-19 pandemic as those protected by the scheme are mainly from the tourist/hospitality and retail industries, industries where incomes are typically low.


For this reason, these people likely do not have a large safety net, so, it is essential that they still maintain some level of income during the pandemic so that they can maintain a relatively equitable standard of living.


Additionally, the Furlough Scheme has enabled more well off individuals to save during the COVID pandemic which means a lot of cash has been saved during the lockdown.


This is significant because as the marginal propensity to save of consumers decreases, consumer spending will increase, this concept is reflected as non-essential establishments saw a massive surge in demand once they opened.


Despite the importance of government spending, borrowing has increased the government debt to 97.7% of GDP, which at first may sound bad, however, the UK government does have an excellent credit rating and will slowly try to pay this debt.


This of course does have the long-term opportunity cost associated with paying back interest.

The government does plan on doing this by increasing the corporation tax rate to 25% post-2023 in an effort to pay back some of the debt from the COVID-19 Pandemic.


So, if growth outpaces the interest, the government should have no problem eventually paying it back with the help of increased taxes.

 

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Research compiled by Billy Ryan.

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