Britain’s cash-strapped government announced on Monday that it needed to borrow another £50bn in August to meet its financing needs, suggesting public finances are weaker than expected.
In the third revision to its financing requirement since March, the Treasury has demanded its Debt Management Office raises £275bn in the first five months of the financial year, compared with a full year estimate in the March Budget of £156bn.
Between April and the end of August, the Treasury will have raised £55bn a month to fund its coronavirus spending, more than four times the Budget plan of £13bn a month.
There has been no strain in the gilts market so far and the government has easily raised these sums, sometimes benefiting from negative interest rates in short-dated government bond markets.
It has also been helped by Bank of England money creation, used to purchase almost exactly the equivalent quantity of existing government debt.
The test will come in coming months when the BoE’s rate of purchases falls to roughly half the level of Treasury issuance.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the rise in private sector holdings of government bonds was “normal”, but it would put some upward pressure on yields, which were currently “exceptionally low”.
The Treasury’s decision only to announce one additional month of debt issuance suggested that officials “really don’t know how much the government is going to borrow or what the size of any stimulus package might be”, Mr Tombs added.
Karen Ward, chief market strategist for Europe at JPMorgan Asset Management, said the government was still likely to be able to finance itself easily through the summer because “there is enough risk aversion in the system and a very high demand for safe assets”, but she cautioned that investors would begin to question current yields if the government showed “huge spending ambitions” for the years ahead.
The Treasury promised to announce a new financing requirement for the three months between September and November at the end of July.
A Bloomberg survey of primary dealers showed that market participants now expect on average the government to issue £412bn of debt in the 2020-21 financial year. That would suggest a sharp reduction in the issuance of government bonds to £20bn a month between September and next March.
But it would still imply a government deficit of more than £300bn for 2020-21, by far the highest on record and, at roughly 15 per cent of national income, about 50 per cent larger than at the peak of the 2008-09 financial crisis.
The difference between the level of debt issued and the lower level of government borrowing relates to the use of debt issuance to refinance matured government bonds.
The government would hope that its level of debt issuance can fall in the second half of the financial year as the economy recovers from lockdown and some of the emergency programmes, such as the furlough scheme and value added tax deferral schemes, wind down.
But with tax revenues struggling and likely to remain weak for many years and the prime minister pledging the UK will “not go back to the austerity of 10 years ago”, the levels of debt issuance are likely to remain high for many years.
The OBR’s most recent assessment from April was that government borrowing would reach £298bn in 2020-21, on an assumption that the government had committed to £123bn of measures to cushion the economy, an estimate subsequently increased to £132.6bn.
The OBR’s assessment did not include any allowance for new government spending or tax cuts in any summer fiscal stimulus package.