Sunday, May 01, 2022
£450bn and counting - the cost in debt of the pandemic
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

There was a time, not so long ago, when it was impossible to get away from Covid-19, which dominated the news agenda for nearly two years. One day we will be able to tell our grandchildren that we were there when Professor Chris Whitty said: “Next slide please”. The pandemic, of course, had a huge human cost, which continues.

Latest estimates from the Office for National Statistics are that there have been 174,413 deaths involving Covid since March 2020 in England and Wales, and 126,619 “excess” deaths. For the latest reporting week, to April 15, there were 1,003 deaths involving Covid, in 644 of which it was the underlying cause. Other figures, from the government’s coronavirus dashboard – now of less interest because mass testing has ended – suggest 2,297 UK deaths within 28 days of a positive test in the latest seven days.

As well as the human cost, there has been a significant economic cost. You might think that is all behind us. Now that the unemployment rate is slightly below pre-pandemic levels, at just 3.8 per cent, and gross domestic product has recovered to where it was on the eve of the pandemic, it would be easy to conclude that we have quickly returned to normal. But there are still nearly 600,000 fewer people in work than there were, and some of the other economic effects are enduring.

That includes the impact on the public finances, and this is a good time to be looking at that. A few days ago, official figures covering the 2021-22 fiscal year were published. They showed that, while the budget deficit came down sharply compared with 2020-21, when most of the damage to the public finances was done, it was both above official forecasts and historically high.

The deficit fell from £317.6 billion in 2020-21 to £151.8 billion in 2021-22, thus dropping from the highest to the third highest on record (the second highest was during the financial crisis). For once the official forecaster, the Officed for Budget Responsibility (OBR) was too optimistic, the deficit coming in a hefty £24 billion above the forecast it made only last month, though the gap should narrow as later data comes in.

The latest figures also provide a running score for the effect of the pandemic, and the economic measures brought in to counter it, on government debt. At the end of March, roughly the wend of the 2021-22 fiscal year, public sector net debt was £2,343.8 billion, more than £2.3 trillion, and equivalent to 96.2 per cent of gross domestic product.

Two years earlier, at the end of March 2020, the debt was £1,793.1 billion, nearly £1.8 trillion, or 82.8 per cent of GDP. I could have started the comparison earlier, given that the first lockdown started in March 2020, as did the furlough scheme, but there was only a small increase in government debt between the end of February and the end of March then.

Both sets of numbers are large and the later ones are considerably larger than those earlier. Government debt at the end of March this year was £551 billion bigger than two years earlier. Relative to GDP it went up from just over 80 per cent to knocking on the door of 100 per cent.

Most of this increase in debt was due to the pandemic, both the effects of a profound economic shock on public expenditure and tax revenues, and the cost of the measures introduced by the chancellor in response to that shock. There was also, embarrassingly for the Treasury, as the guardian of the public purse, widespread waste and fraud. Purchases of unusable personal protective equipment and tales of suitcases of money at airports containing Bounce Back loans do not suggest a tightly run ship.

The debt in cash terms would have gone up anyway, but not by nearly as much. In February 2020, the consensus among economists was the public borrowing – the deficit – would be between £50 billion and £55 billion in both 2020-21 and 2021-22. The debt would have risen by £100 billion or so even if there had been no pandemic.

That leaves about £450 billion as the cost of the pandemic to the public finances, in terms of the addition to government debt. It is a significant sum. It is not as much as a war, to which the pandemic has sometimes been compared. The Second World War increased government debt from 137 per cent to 252 per cent of GDP, roughly equivalent in today’s prices to an increase from £3.3 trillion to £6.1 trillion.

There were, however, clear routes to reducing the debt burden after the war, through demobilisation, lower defence spending and economic growth. The debt fell from 252 per cent of GDP to just 22 per cent over the next 45 years. These days there are no such mechanisms. We face a future of unfavourable demographics and, it seems, low growth.

It is, of course, too soon to close the books on the pandemic. There will be costs for a number of years in clearing the NHS backlog, which ostensibly is the main reason for the National Insurance hike. There will also be costs in the catch-up for pupils, though much less has so far been allocated to that.

In the meantime, one of the chancellor’s big fears, that a combination of high debt and rising borrowing costs will mean a soaring debt interest bill. It was one reason why, in his spring statement in March, he chose not to splash the cash, even at significant personal political cost.

A standout number from the latest official figures was that debt interest rose to a record £69.9 billion in 2021-22, almost double its level a year earlier. The OBR, which got this one pretty much right, predicts a further rise to £87 billion this year, 2022-23.

Most of the increase reflects the impact of higher inflation on index-linked gilts, on which the return is tied to the retail prices index. And, while the money does not have to be paid out until the bonds mature, it still reflects the cost of servicing government debt. This year’s even higher bill is also largely an inflation effect, though also embodies higher interest rates.

The inflation effect will subside if inflation drops back, as the official forecasters expect it to do. But the public finances remain vulnerable to higher borrowing costs and new economic shocks. It is not that long ago, under Gordon Brown’s 1997-2007 chancellorship, that 40 per cent of GDP was thought to be the safe level of government debt and embodied in Labour’s fiscal rules. In very many respects, we are now in a different era.