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Worst week ever for UK economy as deficit soars and retail sales collapse

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Via Yahoo Finance

Record borrowing and an unprecedented collapse in retail sales have laid bare the devastating impact of the lockdown after Britain reported its worst ever week of economic data.

The Treasury borrowed £62.1bn in April, the biggest single monthly figure in history, as tax revenues crashed and spending surged.

It left a deficit far bigger than at the height of the financial crisis and without equal in peacetime – giving weight to Chancellor Rishi Sunak’s warning earlier this week that the country is gripped by a “severe recession the likes of which we have not seen”.

The figures follow evidence of surging unemployment and grim survey readings pointing to a 20pc nosedive in GDP this quarter.

In just one month the Government borrowed almost exactly the same as during the entire last financial year as part of massive efforts to fight the crisis and prevent even worse economic damage. Borrowing in April was far more than planned for the whole of 2020-21.

Taxpayers are footing the bill for an unprecedented support package including a furlough scheme supporting the salaries of eight million UK workers until October.

The dire public finance data were accompanied by more evidence of the impact of the UK’s economic deep freeze on shops as retail and fuel sales volumes plunged by 22.6pc over the same month a year earlier, and 18.1 pc in April alone.

This record collapse in sales effectively wipes out 15 years of growth in retail, with a serious knock-on effect for the Treasury.

In April last year VAT raised £13bn for the Government. This time it cost the Treasury £900m – the first negative reading since 1981 – as the plunge in sales slashed the tax haul and businesses put off their bills, meaning rebates to companies exceeded the amount paid.

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Collections from households plunged by more than £6bn with lower income tax, national insurance and capital gains tax payments after a surge in unemployment.

Corporation tax receipts were just over £4bn lower than in April 2019.

The Office for National Statistics data showed comfortably the highest borrowing on record stretching back to January 1993 as the Government moved towards wartime levels of spending to tackle the outbreak.

Britain’s national debt has also jumped £118.4bn or 17pc in a single year to £1.9 trillion, its biggest yearly increase on record. 

It means debts could soon reach more than 100pc of GDP, a level last seen in the early 1960s.

The surge will further embolden hawks in the Treasury who are pushing for a new round of austerity and brutal tax rises, despite fears this could rapidly derail any recovery.

Pablo Shah, of the Centre for Economics and Business Research, said: “The value of public sector debt is on track to become larger than the size of the economy in 2020. The debt to GDP ratio is likely to fall relatively swiftly in subsequent years, as the UK gradually builds back up its productive capacity.

“Nonetheless, it will settle at a level far above where it was prior to the coronavirus crisis, at which point the government will have to confront the trade-off between meeting its election pledges to scale up investment or focusing on addressing the newly expanded debt burden.”

The cost of the furlough scheme – treated as an employer subsidy by the ONS – has come to £21bn so far over April and March.

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Mr Sunak hopes the cost of the scheme will start to come down as parts of the economy reopen and workers can go back to factories, building sites and offices.

From August employers will have to pick up a slice of the cost of the furlough programme, which pays workers up to £2,500 per month.

Furlough figures embed

It means those 8m workers are not unemployed, but there was still a steep rise in joblessness. More than 850,000 people signed up for unemployment benefits last month, the biggest increase since early 1947 when severe snows temporarily froze the economy.

At the same time the number of job vacancies available in the three months to April dived by 170,000, the steepest fall since the ONS started recording these numbers almost 20 years ago.

Those who do lose their jobs, or who are joining the workforce such as school leavers and new graduates, now face a desperate struggle to find employment.

The cost of financing the enormous debt has not so far proved to be a problem.

For the first time ever this week the UK Government issued a bond at a negative interest rate, indicating that investors are so keen to keep their cash in a safe asset that they are willing to pay for the privilege.

Cheap borrowing costs are also supported by low inflation, which dropped to 0.8pc last month as measured by the consumer prices index, as well as £200bn of bond buying through the Bank of England’s money printing scheme.

The Bank of England has also discussed cutting its base rate into negative territory, which would be its most radical attempt to far to support the economy and boost the recovery when it comes.

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Economists hope that the economy is past the worst as the gradual relaxation of the lockdown should let workers, shoppers and businesses return closer to normal.

Martin Beck at Oxford Economics said it could be “the end of the beginning” as the reopening gets cautiously underway.

He said: “A recovery in activity over the summer should gain strength from low inflation and the resulting boost to spending power.”

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