The economic cost of the Covid-19 pandemic has become truly frightening. In October, the UK’s Institute for Fiscal Studies (IFS) projected a 2020/21 budget deficit for the country ranging from £345 billion (16.7% of GDP) under an optimistic scenario to £376 billion (18.9% of GDP) in a pessimistic one.
Back in March, the forecast was just £55 billion (2.4% of GDP).
During the summer, French budget minister Gerald Darmanin forecast a budget deficit of 11.4% this year, up from 2% in December 2019. But that was before the country was locked down for a second time.
Countries will borrow to plug the gap, but – as economies shrink and take their tax bases with them – how are they ever going to be able to repay?
Governments around the world face several choices. The first is to raise funding in the capital markets at often historically cheap rates.
The response to the EU’s €17 billion offering under its emergency Support to mitigate Unemployment Risks in an Emergency (Sure) programme this month leaves little doubt as to investor appetite for this type of risk.
But governments cannot simply borrow their way out of the deficits that they are now burdened with – not least because the more borrowing they do, the more expensive this will eventually become.
