October 24th, 2020

Government borrowing in the first six months of the year, increased to £208 billion. That's an increase of £175 billion on prior year. Total debt increased to £2.1 trillion at the end of September, that's 104% of GDP.

In the first six months of the year, the Debt Management Office issued £306 billion of gilts. Net of redemption, new gilt issuance totaled £240 billion.  So how was that funded?

The Bank of England purchased some £268 billion of gilts over the period. The Old Lady was forced to step in as the "buyer of last resort". The pretense of QE abandoned, the minutes of the MPC meeting now openly talk of the "purchase of government bonds". According to Andrew Bailey, Governor of the Bank of England, "the government would have struggled to fund itself" without central bank intervention.

In the current financial year, markets expect total borrowing to increase to £325 billion. The level of debt could increase to £2.5 trillion by the end of the next financial year. Central Bank holdings may increase to £1 trillion to finance the deficit. The process of "Dire Straits Economics", that's "money for nothing, gilts for free", is expected to continue.

For the moment, markets are unconcerned. Moody's may have lowered the UK credit rating from Aa2 to AA3 this month but Sterling closed higher against the Dollar, at $1.3029. More spending is expected as the "Fears for Tiers" spread.

The Chancellor was forced to announce a further support package for business this week, the fourth in as many months. Criticism of the end of the furlough scheme mounted. The chancellor was obliged to expand the Job Support Scheme. The new plan will pay a larger share of workers' wages, with more money for the self employed and grants for businesses, forced to close in areas affected by lock down measures.

The latest data suggests the recovery is still intact. For the year as a whole the economy is expected to contract by 10% with growth of 6.5% to follow in 2021. The big question is just how many jobs will be lost by the end of the year. The latest offerings from Treasury may have little impact over the next few months ...

That's all for this week! Have a great, safe, week-end ... Hands, Face and Space ...

John

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