Author: By James Moore, Deputy Business Editor
Total borrowing now stands at a colossal £799bn ? 56.6 per cent of gross domestic product (GDP).
Debt as a proportion of national income is expected to surge above the level it reached when Jim Callaghan was forced to go cap in hand to the International Monetary Fund in 1976. And as a proportion of GDP, it is shooting up to levels not seen since Britain was paying off the borrowing it incurred to fund the Second World War.
Economists said a repeat of Mr Callaghan’s efforts was unlikely, given interest rates are much lower than at that time. But they said an incoming administration will have to bring in an austerity budget after the election.
The ratings agency Standard & Poor’s has put Britain’s prized AAA rating on credit watch with negative outlook, which is often the precursor to a downgrade. If that happens, the interest that the taxpayer pays on the debt could increase sharply.
A substantial proportion of the debt increase has been due to the Government bailout of the banking system and increased spending on social benefits due to rising unemployment.
However, the figures were not as bad as the consensus forecast of £15bn and the Chancellor, Alistair Darling, is on track to meet his forecast of net borrowings of £175bn for the year.
But George Buckley, the chief UK economist at Deutsche Bank, said: “These are still very, very poor figures. There is a huge increase in the level of the deficit. The political parties are not yet willing to be fully honest about the scale of it just yet. They need to be careful because they are in the run-up to an election.
“This is why S&P is likely to wait until afterwards to re-evaluate their stance. A lot will now depend on how the economy performs but even if it does recover, that won’t feed through to the public finances immediately.”
Tax receipts are also falling; Government outlay rose 11 per cent year-on-year to £49bn in June but the tax take dropped 5.7 per cent to £35.5bn
Mr Buckley said any incoming Government faced a difficult balancing act, having to rein in debt enough to keep buyers of its bonds onside while at the same time not cutting so severely that a fragile recovery is choked off.
International organisations including the International Monetary Fund have criticised the Government for failing to set out a sufficiently robust plan to cut debt. Mervyn King, the Governor of the Bank of England, has described the Government’s borrowing levels as “extraordinary”.
The debate over debt levels and the need to cut public spending have produced some of the sharpest political exchanges in recent months.
Some economists believe the public finances will deteriorate later this year so that borrowing overshoots Mr Darling’s prediction of £175bn, despite the latest better than expected numbers.
Vicki Redwood, a UK economist at Capital Economics, said: “So far it is on track but we still think that the figure is more likely to reach £200bn by the end of the year. The economic implications of this are pretty huge.”
Markets had accepted that the Government had to spend to kick-start the economy and head off a 1930s-style depression. There also still seemed to be enough appetite among institutions for Government bonds which was helping to sustain the borrowing levels.
But this could not last, she said. “The danger is that when the Government does have to tighten fiscal policy that means sharp spending cuts and a tax squeeze. We could see tightening before the economy is really ready.”
David Page, an economist at Investec, said: “This level of [borrowing[ is certainly unsustainable. It is there to provide fiscal stimulus to an almost unprecedented shock to the economy.”
While it was possible for Mr Darling to hit his borrowing target or come in beneath it, he said: “The still parlous state of the public finances requires significant remedial action which looks likely to be stalled until after [the] general election. At that point, significant corrective action will be required to return the finances to a sustainable level over the medium-term.
“This fiscal tightening is likely to be driven by spending cuts under either a Labour or a Conservative government. However, we suspect that increases in general taxation will also be needed, particularly as politicians rush to ring fence departmental expenditure.”
He chided Robert Stheeman, the chief executive of the Debt Management Office, for suggesting on Monday that it would take “more than one ratings downgrade to hurt foreign appetite for gilts [government bonds]”.
Public borrowing for May was revised down to £18.6bn from an initial estimate of £19.9bn.
Britain’s current total borrowings.
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