How will Govt’s record borrowing affect UK investors?

22 November 2020

The latest public sector finances data showed Government borrowing continued to soar in October, as the Covid-19 pandemic wreaked havoc on the economy.

The Office for National Statistics said UK borrowing rose to £22.3 billion last month, marking the highest October figure and the sixth highest borrowing in any month since monthly records began in 1993.

The government was estimated to have spent £71.3 billion on day-to-day activities last month, £6.4 billion more than in October 2019. This growth included £1.3 billion on the Coronavirus Job Retention Scheme and £0.3 billion in Self Employment Income Support Scheme payments.

Meanwhile, government tax receipts fell £2.7 billion year on year to £39.7 billion in October, with falls in VAT, Business Rates and income tax having the biggest impact.

While the overall borrowing figure was less than September’s £36.1 billion and below what analysts had been anticipating, October’s figures push the UK’s total debt to £2,076.8 billion, or 100.8% of GDP  – levels not seen since the early 1960s.

Commenting on the figures, Paul Craig, portfolio manager, Quilter Investors, said: “It is clear the recovery from Covid-19 will not be quite the dramatic V shape we were all hoping for and with extra borrowing required for the current lockdown and furlough extension to March, it will be some time before things look ‘normal’ once again.

“That said, these figures will not concern the Treasury or the Prime Minister. Interest rates remain at record low levels and the prospect of them turning negative remains on the table, although we still see this as a nuclear option. What is clear is the Bank of England is on standby to work more of its magic to not only get us out of this situation when the time comes, but also to continue funding the government’s spending commitments, of which there have been swathes of them this week.”

Boris Johnson recently unveiled his ten-point climate change plan, estimated to cost £12 billion in government investment. However, Craig said the real figure would likely run into the “high hundreds of billions” over the next decade if the Prime Minister wants to make a real impact with his green agenda.

Craig added: “All this leaves the Chancellor with a bit of a balancing act in the weeks ahead. Not only does he have to contend with a spending review next week, but with Brexit negotiations hurtling towards the finishing straight it remains uncertain what the fallout of this is going to be on the economy.

“For now the UK remains a difficult place for investors to analyse. Many of the large companies are facing structural issues, often accelerated by coronavirus. But this does not mean the country is uninvestable. The government, through all this borrowing, is supporting many businesses and some continue to thrive. Should we see a resolution to the Brexit negotiations, the small and mid-cap sector will look attractive as the discount begins to subside.”

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