Economical Truths: UK Public Debt Hits Record Highs

Economical Truths: UK Public Debt Hits Record Highs​

The Story

It was announced on Friday that the UK government borrowed £19.1 billion in February – the highest figure for February since records began in 1993. This also equates public net debt to 97.5 per cent of GDP (Financial Times). Chancellor Rishi Sunak explained this as “the fiscally responsible thing to do and the best way to support the public finances in the medium term” (BBC news).

Such high public borrowing will come as no shock. This is especially in light of the UK’s March budget of £93 billion virus-related support measures for 2021-2022. Further, the recent announcement of a $1.9 trillion US fiscal stimulus package highlights that governments globally are looking to intensify inflationary fiscal policy. Guidance from the IMF suggests countries with large public debt should “provide temporary fiscal stimulus while planning for an adjustment over the medium term” with the imposition of carbon pricing and green policies as part of a post-pandemic reset (IMF).

The flipside of this, as acknowledged in the March 2021 budget, is the inevitable need for corporation and income taxes in future years to finance high levels of public debt. In the UK, the rate of corporation tax will increase to 25% in 2023 (for companies of a certain size).

Proponents of Ricardian Equivalence are unlikely to be persuaded by the government's policies. Under this theory, while the main goal of expansionary fiscal policy (through measures such as increased public spending or tax cuts) is to stimulate overall demand, people will save based on their expectation of increased future taxes, thus offsetting the impact of increased government spending.

What It Means For Businesses And Law Firms

Continued support, in the form of a six-month extension to the furlough scheme, a freeze in alcohol and fuel duty, and 15-month long business rates holiday will likely be welcomed by businesses.

Further, Keynesian proponents would likely find that, even at the expense of high net public borrowing levels, providing fiscal support will lead to higher employment, greater aggregate demand, and economic growth. Moreover, in the current economic climate, fiscal stimulus is very much reactionary and necessary for stabilisation.

Law firms could advise companies on their eligibility for certain government grants and business tax reliefs. Similarly the extension of a stamp duty holiday until 30 June 2021 could provide increased work for property lawyers, if house buyers seek to make the most of the relief.