Alongside the very tragic, human cost of Covid has come the huge financial impact. Nowhere is this more clearly demonstrated than in the increase in the UK’s budget deficit. Whilst the debate rages on about how the much-needed financial support provided to millions of individuals and businesses will be paid back, I thought it would be interesting to pick out the highlights from the OBR’s (Office for Budget Responsibility) forecast for 2020/21 released at the end of last year. Although now out of date, it still represents a good guide to the allocation of funds in the 2020/21 fiscal year.
The deficit for the 2020/21 tax year was already forecast to be £55bn and it was expected that this would rise to a fairly staggering £394bn. This £339bn increase is as a result of lower economic activity leading to lower tax revenues (£106bn), increased government spending to tackle the pandemic (£127bn), general welfare support measures (£11bn), support directly to households (£82bn) and business support measures (£71bn), but offset by reducing factors such as lower interest rates on borrowing (-£58bn).
Of the support expected to be given directly to households of £82bn, £54bn has gone to fund the furlough scheme, £20bn to the self-employed and £8bn on welfare. Of the £71bn expected to be given to businesses, £40bn has been allocated by way of grants, with a cool £31bn earmarked for defaults in business loans which are guaranteed by the government.
To help you put all of this into context, the UK’s gross receipts from tax revenues in 2020/21 came to £793bn. Government spending was equivalent to 52.2% of GDP in 2020/21 and the public debt stood at 97% of GDP. We borrowed an extra £4500 per person in 2020/21, taking total borrowing per person in the UK to around £32,000 as at April 5, 2021. UK government borrowing is higher than the G7 average – only the US is borrowing more as a percentage of its GDP.
Whilst the level of Covid support spending in 2020/21 was huge and will have continued to rocket in the current tax year, it is designed to prevent a much worse, longer-term blow to the country’s economic output, on which future tax revenues depend. It is still expected that despite these efforts, the economy could be permanently reduced by 3% at a cost of £40bn p/a to the public finances, but £70bn p/a to the wider national income. Without the support measures, designed to keep good businesses afloat and able to bounce back, and people in their jobs, the impact could have been far, far worse.