UK public health campaign coronavirus
The government moved in quickly to offset the chance of widespread job losses, but it has come at a considerable cost. One look at the widening budget deficit will offer an indication of the pain in store. Image Credit: Reuters

London: UK government debt rose above 100 per cent of gross domestic product in May for the first time since 1963, reflecting a precipitous drop in economic output and a surge in spending to counter the fallout from the coronavirus pandemic.

Borrowing increased by more than 100 billion pounds ($124 billion) in the two months to May, as tax revenue plunged and the government deployed a massive support package to save jobs and keep businesses afloat during the lockdown.

The recession ripping through the economy will strain Britain's public finances for several years to come. But the figures are unlikely to rattle bond investors relying on the Bank of England to keep borrowing costs at record lows. The yield on 10-year debt was little changed at 0.23 per cent.

A debt spiral into triple digits

Italy, among the worst hit and with an already huge debt pile, could see its ratio top 150 per cent of GDP this year. France's statistics office said Friday that it's net debt ratio rose to almost 92 per cent at the end of the first quarter.

UK figures show central government spending surged almost 50 per cent in May alone and revenue plunged by over 28 per cent, leaving borrowing at 55.2 billion pounds - the highest single month on record.

"The best way to restore our public finances to a more sustainable footing is to safely reopen our economy so people can return to work," UK Chancellor of the Exchequer Rishi Sunak said. "We've set out our plan to do this in a gradual and safe fashion, including reopening high-streets across the country this week, as we kickstart our economic recovery."

Separate data Friday highlighted the long road ahead. While retail sales started to recover last month from their steep drop during the lockdown, they remain well short of their previous trend.

"We now expect the economy to contract by 9.5 per cent in 2020, down from our previous forecast for a slump of 7 per cent," said Dan Hanson, senior UK economist. "We also see a more modest rebound in activity in 2021 with the economy growing 6.5 per cent. That compares with our earlier estimate of 9 per cent."

The budget deficit in the current fiscal year, forecast to be around 55 billion pounds when Sunak took over, is now on course to top 270 billion pounds, according to the latest survey of private-sector economists compiled by the Treasury. That's equal to about 14 per cent of GDP, more than at any time since World War II.

A slow recovery could mean borrowing as much as 70 billion pounds more in the 2024-25 fiscal year than was predicted in March, the IFS said, while even a faster rebound may mean the figure is 40 billion pounds higher.