The government will borrow £180 billion from the markets in the next three months to fight the economic collapse caused by the shutdown, providing the first official indication of the cost of the pandemic.
Combined with a record debt issuance of £45 billion this month, the government now plans to raise £225 billion in the first four months of the financial year alone. In the budget of March 11 it had expected to raise £156 billion for 2020-21.
The Treasury’s fundraising plans suggest that it expects the cost of the pandemic to come to about £165 billion. That figure could be higher if the outbreak causes the lockdown to be extended for longer than is hoped.
Before the crisis the Debt Management Office (DMO) was on course to raise about £60 billion in the four months to July. The increase, of £165 billion, is “to meet the immediate financing need resulting from Covid-19”, the Treasury said. “This higher volume of issuance is not expected to be required across the remainder of the financial year,” it added.
Gilt issuance is not the same as the budget deficit because it includes debt that has matured and must be replaced, on top of new borrowing to finance new spending. The DMO’s remit clearly shows, however, that the deficit will surpass the £158 billion peak in 2009-10 in the aftermath of the financial crisis and is certain to top that year’s gilt issue record of £227.6 billion.
Richard Hughes, an associate at the Resolution Foundation think tank, said: “The combination of falling tax receipts as economic activity declines and extra spending to combat the economic crisis means that the government is facing a dash for cash to cover its huge financing requirements. The £225 billion of gilts that will be issued over four months shows the scale of cash the government needs and that need may grow if economic activity continues to be significantly depressed for over three months.”
In the financial year to March 2020 the government borrowed £48.7 billion, according to the Office for National Statistics: £1.3 billion more than projected in the budget of March 11. Borrowing in March alone was £3.1 billion, the highest for that month since 2016.
At the March budget, the chancellor set the DMO’s financing remit for this year at £156 billion and the Office for Budget Responsibility, the government’s independent fiscal forecaster, projected that the deficit this year would be £54.8 billion.
Earlier this month, it said the huge rescue package – which includes the furlough scheme, tax breaks and increased welfare – and the cost of the recession would drive the deficit this year to a record £273 billion. Its forecasts indicated that the state would have to raise £384 billion in the market to cover all financing needs.
The new DMO remit suggests that the Treasury believes that it will approach that level. Resolution estimated that a six-month lockdown would require the government to raise about £500 billion in financing this financial year. The £60 billion average gilt issuance planned for each of the next three months would be a monthly record.
The Bank of England’s quantitative easing programme will help to ensure that debt markets continue to function and there is no shortage of buyers. The Bank has increased QE by £200 billion and is buying roughly £50 billion a month of gilts, allowing institutions to flip their purchases on to the Bank.
Marc Ostwald, chief economist at ADM Investor Services International, said that the issuance would “certainly present a demand challenge” for the markets, which never before experienced this level of gilt supply. “The Bank’s QE purchases will offer considerable alleviation,” he added.
Mr Hughes said: “Close co-operation between the government, the Bank, and the gilt market will be needed.”
The Treasury will announce how much further borrowing it will need for the rest of the year on June 29.
