26 May 2020

Despite the fact that the UK government appears, like Gilbert’s Duke of Plaza-Toro*, to be leading from behind, I suppose that this fearful fog of indecision will eventually dissipate and some kind of hobbled phoenix will stumble out of the smoking ashes of the economy.

In passing, I would like to bestow their share of responsibility on the political opposition, including the trade unions, who constantly urge caution and demand something called “safety” for all, in the calculated knowledge that the worse the economic consequences of lockdown, the worse for the government. 

Can they really be that cynical? Oh yes.


But whether you believe that lockdown was a) catastrophically late or b) completely unnecessary, (and history may one day deliver a verdict but you won’t find it on Twitter this afternoon), a vast amount of economic damage has been done. And the longer paralysis continues, the worse it will be. 

And given that the government is now a follower of international decisions rather than a decision maker itself, we must look at the US, Germany, France (!), Sweden and pretty much anywhere else you care to name to see how our future might look.  

Donald Trump has an election to win in November. (Ladbrokes still has him as the marginal favourite, which seems surprising). Naturally, he is desperate to get America back to work and, as his son says, make it great again, again. Whether you think he is gambling with people’s lives or trying to save them from destitution actually doesn’t matter. What matters is what has already happened. 

The US unemployment rate jumped from 3.5% in February to 4.4% in March to 14.7% in April. That’s 23 million Americans out of work. But it will be more than that. The total of initial unemployment claims is at nearly 39 million by the end of last week. That looks like an unemployment rate closer to 25%, an utterly unimaginable number. 

If it turns out that “it’s the economy, stupid” then Trump’s Thanksgiving turkey is cooked unless there is a near-magical recovery. Whatever you think of Trump, and there is no need to say or even think it out loud, a sense of urgency is a welcome contrast to the Battle of the Somme spirit in the UK that appears to be ordering our citizens to walk slowly towards the guns.


In the UK the government is paying big money to delay the pain. 7.5 million jobs have been “furloughed” under the so-called job retention scheme. This runs until October when there is a vague hope but no obvious plan that these currently non-existent jobs will somehow have been saved. 

The 5.4 million public sector workers, such as teachers, are almost all still being paid in full so the furloughed workers are from the 22.2 million or so of private sector workers. That’s a notional 34% (7.5 million of 22.2 million). In addition there are 5 million self employed, many of whom are being swiftly and surely ruined. 

Taking the UK’s adult workforce as a whole, including self employed, there are 33 million. It is all too easy to imagine that without a dynamic recovery, we could have five or six million unemployed. The only people who have lived through and can remember anything remotely like that are now over 90. By the end of 1932, unemployment hit 3.5 million and the rate was above 15%.

I don’t believe that my fellow citizens who think that wearing an itchy mask will keep them safe have the remotest idea what this recession is going to feel like. Millions of people have the prospect of financial insecurity, mental health challenges and restricted choice ahead of them. 


School children are missing school. As usual, middle class parents with sharp elbows will make sure that their own offspring have a relative advantage.

Qualifications and some university degrees will go missing. I have seen a forecast that half the UK’s universities will go bust. Even if you think this is a net benefit for the children it will be a real blow for the academic and support staff and for the local areas where retailers and especially landlords will suffer a potentially financially fatal drop in demand. Everywhere you look, the dominoes will fall. 

The new job market will wither. A painful number of jobs that graduates have already won for this autumn will suddenly not be there. 

Working age adults, especially in the private sector, will see waves of job losses and rising personal debts. There will be vast numbers of potential mortgage defaults.  

Commercial property may be worse. Many small businesses, especially in the hospitality sector, are already effectively crippled. They are asking for rent holidays from their landlords. Many landlords will have loans that are secured on the properties and they need the rental income to service their own debts. 

The next domino is the banks which must decide whether to suspend their own interest demands or foreclose and try to cover the loans by conducting an asset fire sale. As ever, it may be that the most unforgiving lenders that foreclose first will lose the least. 

And last but not least, retired people who rely on dividends and other interest income will be hit hard. And as for those who believe that their pension is their house: well, all they need to do is to sell it for the highest possible price. Good luck to them.

Ultimately, the unemployed, the old, the universities, the business consultants, the retailers, the hospitality and travel companies, anyone I’ve missed out and, of course, the banks will all be looking to be rescued by the government.


Perhaps the most painful observation is that the British public appears to be quite happy. 

It is logical to assume that people are spending less money and therefore saving more. This appears to be conferring some feeling of financial security. A Daily Mail survey published on 22 May says that 33% of people feel better off compared to 29% who feel worse off. For public sector workers, these numbers read 46% and 23% respectively.

A majority of people are against anything at all reopening and 60% would not send their children back to school on 1 June. Whether this new spirit of Puritanism survives the era of austerity squared that awaits it remains to be seen.

Presumably people think that the government will keep them safe.

And how is the government doing?


The government’s accounts, both its net debt (balance sheet) and its period deficit, are, like yours and mine, the result of incoming receipts against outgoing expenditure. In the financial year to March 2020 the government borrowed £62.7 billion on top of what it already owed (which was £1770 billion or to express it in the new numerical normal, £1.7 trillion).

In April 2020 the government borrowed in that single month the same as it had borrowed in the whole of the previous year. The total debt is now up to £1889 billion, roughly equivalent to 100% of GDP but watch out above.

To drill down into April 2020 a little deeper, spending was £109.3 billion and receipts were £45.6 billion. For the record, in April 2019 receipts were £62 billion and expenditure was £71 billion. So the gap (deficit)  between the two rose from £9 billion last year to £63.7 billion. That was the first month of lockdown. Now we are completing the second.


Much of the gap in April was covered by issuing £58.5 billion of gilts at famously low interest rates.

You might ask what deranged people would fund a growing and apparently out of control debt so generously at such a time. The answer is that for 85% of the total the borrower and the lender was the same deranged guy. The Bank of England Asset Purchase Facility Fund (aka APF) purchased £43.7 billion (nominal) from the Treasury out of a total of £51.7 billion (nominal) issued.

The APF was set up in 2009 to act as the Treasury’s broker to purchase long term assets, mostly gilts, in order to boost their prices and rescue the institutions that held them. This was QE, first a rescue act and then an attempt to boost the economy. 

In November 2012 the APF started to pay the income on the gilts that it bought straight to the Treasury, an explicit recognition that they are ultimately part of the same institution.** But buying new gilt issues directly is not a technical change but a whole new game of fantasy funding. In March this year the APF’s potential buying power was increased by £200 billion, a boost of around 50%.

From May to July the Treasury plans to raise another £180 billion in gilt sales. There is £156 billion nominal firepower left in the APF which is c.87% of the requirement. 

Whether that will be sufficient for Treasury needs remains to be seen. Because while government expenditure is set to rocket, receipts are likely to plummet. 


Government receipts for the year 2019-20 are estimated to have totalled £660 billion. My personal estimate for the current year is that this will fall by 12% or £80 billion. The shortfall will come principally but not only from lower income tax (my estimate -15%), national insurance (-10%) and corporation tax (-50%) revenues. There are plenty of other holed income streams (property transaction tax, vehicle excise, air passenger duty, betting duty) which are not material in terms of the overall loss but which serve to illustrate how comprehensive the recession will be.

We already know that expenditure rose by £38 billion in April. Given the waves of extra spending pledges that appear every week, it does not seem outrageous to annualize that figure. That would give us £450 billion of extra expenditure. The Office of Budget Responsibility appears to be using a figure of “only” £300 billion.

in a year missing £80 billion revenues, £450 billion new spending would add up to a deficit for the year of £530 billion. 

So far, the Treasury has announced £180 billion of forthcoming gilt sales (from May to July), most of which, as already mentioned, it will purchase itself. But this still appears to leave a shortfall of £350 billion.

It is all too easy to see that by the end of this year the UK will be suffering a severe recession, catastrophic unemployment and a growing deficit that outstrips what appears to be the Treasury’s funding capacity. This is why I have written before of a looming crisis of confidence in sterling. 


A disaster for the economy is not always a straight read through for the stock market, which arguably anticipated much of what is to come when it fell by up to 34% in the first quarter. Large British companies tend to have exposure to overseas economies (see comments about the US above) and might also provide some protection against inflation.

Gilts should in theory represent the least attractive investment imaginable but if the Bank of England keeps buying they will be expected to hold up. 

Property will be of most interest to many people. The outlook for commercial property, as mentioned before, looks unequivocally disastrous. It doesn’t look much better for residential.


I mentioned before that I backed Labour to win the most seats at the next general election. The odds of 13-8 against have now shortened to 5-4 against. That meagre crumb is all that is going well.


*In enterprise of martial kind,

When there was any fighting,

He led his regiment from behind —

He found it less exciting.

But when away his regiment ran,

His place was at the fore

Gilbert & Sullivan: The Gondoliers


**Bank of England Act 1998

Treasury’s reserve powers

19.—(1) The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances.


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