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U.K. Posts Record Budget Deficit; Retail Sales Drop on Virus

Updated on
  • April figure all but equals borrowing for previous fiscal year
  • U.K. retail sales collapsed by almost a fifth in the month

Britain posted a record budget deficit in April as the government unleashed an unprecedented package to prevent the collapse of the virus-stricken economy.

The figures reflect the cost of interventions announced by Chancellor Rishi Sunak, including paying the wages of 8 million furloughed workers, a surge in welfare claims and the hit to tax revenue as the economy plunged into recession. The price may yet go higher the longer the lockdown restrictions last.

U.K. budget deficit shoots up to record high on pandemic spending

While the government’s efforts have protected jobs, many are still struggling. Authorities said Friday banks should extend mortgage holidays for homeowners facing hardship by a further three months.

The devastating impact of the virus was also on display in retail sales figures, which dropped by almost a fifth in April. Luxury goods maker Burberry announced it was unable to give guidance for next year as half of its stores are currently shuttered.

The deficit of 62.1 billion pounds ($76 billion) -- the most since modern records began in 1993 -- was as much as in the whole of the previous fiscal year and almost three times the previous peak. Even during the financial crisis, monthly borrowing was never more than 22 billion pounds.

The pound declined 0.1% to $1.2206 and is the biggest loser among its Group-of-10 major peers this quarter, sliding around 1.7%. But U.K. gilt yields remain near a record low, thanks in part to the Bank of England’s bond-buying program.

What Bloomberg’s Economists Say

“By announcing an enormous QE program in March, the BOE has provided a stable source of demand in the gilt market which has helped keep borrowing costs at record lows despite the government unleashing an enormous fiscal stimulus. We think sticking with that policy mix would be the most effective way of supporting the economy as it recovers.”

-Dan Hanson. Read his U.K. INSIGHT

BOE Deputy Governor Dave Ramsden is open-minded about pushing the benchmark interest rate blow zero, he said in an interview with Reuters published Friday. The recovery may take longer than expected and the central bank may expand quantitative easing next month.

Central government spending surged 57% compared with April last year. Revenue meanwhile plunged 27%, with cash receipts of value-added tax falling to zero amid reduced consumer spending and a deferral scheme that enables businesses to pay the sales levy later. Net debt including Bank of England programs jumped to almost 98% of gross domestic product, the highest level since 1963.

Direct government measures have already cost more than 100 billion pounds, according to the Office for Budget Responsibility, which now expects a shortfall of over 300 billion pounds, or 15% of GDP, this fiscal year.

That’s left a debate raging over how Britain should pay the bill. Borrowing costs are at record lows and pressure is mounting on the government not to return to the era of austerity and instead reduce the burden by letting growth rip.

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“If the increase in borrowing is a one-off then one option could be to manage down the elevated debt stock gradually over many years,” said Isabel Stockton, research economist at the Institute for Fiscal Studies. “Should higher borrowing endure –- for example, because the economy doesn’t fully bounce back -– then tax rises or spending cuts would be needed if borrowing is to be returned to its pre-crisis path. Any additional spending pressures arising from the current crisis would also put upward pressure on taxes.”

Despite some easing of the lockdown measures in place since March 23, shops and businesses remain closed, putting the country on course for its deepest recession since the early 1700s.

The most expensive of the government support measures is the Job Retention Scheme, which cost 14 billion pounds in April and led to an upward revision for March, the ONS said. The central government net cash requirement, the basis for bond issuance, totaled a record 63.5 billion pounds last month.

The government is also providing loans to businesses, although even that could have lasting damage on the public finances. A survey by the Business Banking Resolution Service found that more than 40% of firms do not intend to repay money taken out through guaranteed loan plans such as the Bounce Back Loan program and Coronavirus Business Interruption Loan Scheme. Government loan plans have has already paid out more than 21 billion pounds, according to the Treasury.

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— With assistance by Jill Ward

(Adds loan survey, VAT details, Institute for Fiscal Studies comment)