Key Questions

How did COVID affect government revenues, spending, borrowing and debt?

The COVID-19 crisis entailed a record-breaking fall in output and increase in government spending. The economy will bounce back but debt remain high.

The economic lockdown that followed the outbreak of COVID-19 in the UK resulted in GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more being almost 10% lower in 2020 than in 2019. This is huge. Records suggest it is the biggest year-on-year decline in activity in over 300 years since the Great Frost of 1709. The initial impact of the COVID-19 crisis has been much greater than the impact of the 2008 financial crisis – a previous record-breaker. But the COVID-19 crisis is forecast to have less of an enduring impact on the size of the economy as it is expected to bounce back strongly once lockdowns end.

This huge decline in economic activity has been reflected in government borrowing hitting a peacetime high in 2021, breaking a record previously set during the financial crisis. It is forecast to fall quickly, but this is predicated on a strong economic recovery, additional spending done through the pandemic proving to be entirely temporary, and announced tax rises (or equivalent) being implemented.

Two ‘once in a lifetime’ economic shocks in a little over a decade will push debt to over 100% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more.

Long-run hit to the economy

The economic crisis caused by COVID-19 is expected to do less long-run damage to the size of the economy than the 2008–09 financial crisis.

As the economy reopens, activity is expected to recover quickly. Budget 2021 forecasts suggest a return to 2019 levels of activity during 2022. This may prove correct. But the crisis will have done some enduring harm to the economy as, for example, some valuable businesses and jobs have sadly been lost. This can be seen by the latest forecasts (shown in red in the chart above) suggesting that the economy will not return to the growth path forecast in March 2020 (produced largely before the economic impact of COVID in the UK was anticipated and shown in dotted red), but instead remain smaller than expected for several years to come.

This path for the economy contrasts quite starkly with that seen following the financial crisis (shown in green in the above chart). The initial hit to the economy from the financial crisis was much smaller than that seen in the 2020 lockdown. But output took five years to recover to its pre-crisis level, instead of the two years expected for the COVID crisis. The weakness of this recovery meant that in the years after the financial crisis, GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more ran much further behind what had been forecast prior to the financial crisis (as can be seen by comparing the green solid line and the green dotted line). The economic recovery from COVID-19 is expected to be much stronger.

Record spending and borrowing

Borrowing – which reflects the difference between what government spends and what it raises – is estimated to have reached almost 17% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more in 2020–21. This is easily the highest level of borrowing since the Second World War. The previous peacetime record, set in 2009–10 following the financial crisis, was 10%.

The sharp increase in government borrowing in 2020–21 was entirely due to spending rising – as opposed to tax revenues falling – as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more. This is shown in the following chart.

Huge amounts have been spent in response to COVID-19, including on the furlough schemes for employees and the self-employed and on personal protective equipment (PPE), the test-and-trace scheme and the vaccine roll-out. The amount spent on increasing the generosity of working-age benefits since April 2020 – notably the £20 per week uplift to universal credit and tax credits – has been bigger than that spent in response to the financial crisis.

A similar pattern – of very little change in tax revenues as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more and large changes in spending as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more – was seen through the financial crisis (albeit with a smaller initial increase in spending). More generally, recessions tend to have this pattern because while cash-terms tax revenues tend to fall (roughly) in line with GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more (therefore leaving the ratio of revenues to GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more broadly unchanged), cash spending tends to be pushed up and therefore represent a larger share of a smaller GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more.

Tax revenues in the crises

While tax revenues fell broadly in line with the overall fall in GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more in both the COVID-19 and financial crises, there were changes in the composition of revenues. In the first year of the COVID crisis, receipts of National Insurance, PAYE income tax and corporation tax all held up better as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more than they did in the first year following the financial crisis (with, in particular, PAYE income tax growing rather than falling as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more). This likely reflects the impact of the financial crisis on the profitability of the financial sector and, with it, the bonuses received by its often well-paid employees (who therefore contribute relatively more to overall income tax revenues). In contrast, the first year of the COVID crisis saw revenues from fuel duties fall as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more. This was a direct impact of lockdown and did not occur during the financial crisis.

Spending cuts and tax rises due to reduce borrowing quickly

Government borrowing is forecast to fall sharply from the second half of 2021–22. In contrast, the weak economic growth following the financial crisis saw public sector net borrowing remain elevated for much longer than is forecast to be the case this time.

  1. While spending as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more is forecast to remain elevated, in cash terms the government is assuming that all of the additional spending it has announced since the pandemic began will prove to be temporary, and it has actually pencilled in plans to spend less on public services from April 2022 than was envisaged prior to the COVID crisis.
  2. The government has announced tax rises – notably an increase in the rate of corporation tax and a freezing of the income tax personal allowance and higher-rate threshold – that will increase revenues as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more.

In contrast to what happened after the financial crisis, cuts to spending as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more are forecast to do less, and increases in tax as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more to do more, to bring down borrowing in the coming years.

Government debt around 100% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more

Even if, as is forecast, borrowing falls relatively quickly towards the level it was prior to the crisis, the record borrowing done through the crisis has added considerably to the stock of public sector net debt – just as it did in and following the financial crisis. Whereas public sector debt was running at around 35% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more prior to the financial crisis, and at around 80% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more prior to the COVID crisis, it now stands at around 100% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more. As shown in the chart below, this is the highest level of UK debt since the start of the 1960s. While high by recent historical standards, levels of debt higher than 100% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more were, however, the norm over the 40 years from the First World War and over the 100 years between the mid 1700s and the mid 1800s. The 2021 Budget forecast suggests that UK debt will rise further as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more over the next few years. Even if borrowing is then brought swiftly back towards pre-crisis levels, this elevated level of debt will require careful management over many decades.