'Til debt do us part: the impact of the pandemic

LSCA Business Board member Vincenzo Leporiere explores how the financial impact of the pandemic may affect us in years to come.

May 2021

There is no doubt that the tone of the news flow in the UK is rapidly improving on both the health and economic fronts. The Covid-19 vaccination programme has so far proven to be a great success story, enabling the UK Government to continue its roadmap towards returning the country to some sort of normality.

Economic activity is also picking up, whether we’re looking at GDP figures, PMI data or broader business sentiment surveys (the latest Deloitte CFO Survey was the most consistently positive since its launch in 2007).

It seems we can now start to get used to a much more positive news flow, right?

Well, not really. Let’s assume we have now gone through the worse of Covid (a big assumption, I know), what seems to have almost disappeared from news outlets is talk of the long-term scarring caused by Covid, the ‘economic long Covid’. For the purpose of this article, I will only focus on some aspects of the economic scarring, and even then, we would only just be scratching the surface.

In 2020 the UK economy suffered its biggest annual contraction in over 300 years, with GDP down 9.9% - far worse than anything seen in the Great Depression. The pandemic has had a substantial impact on the economy and subsequently on public sector borrowing and debt.

Our NHS has needed extra money to keep on fighting the pandemic, whilst the Government has spent hundreds of billions supporting businesses and jobs. At the same time, the pandemic and the resulting unprecedented lockdowns have reduced the amount the Government has raised in taxes.

Whether it was less income tax as a result of people on furlough or unemployed, less corporation tax as corporate profits plummeted or less VAT as shoppers bought less (and some were able to save more.), Government’s coffers had to be topped up and there was only one option: to borrow.

Public sector debt has risen to levels last seen in the late 1950s, when the UK was winding down wartime borrowing.

Extra borrowing has pushed up the ratio of public sector net debt (PSND) to GDP fourfold. The Office for Budget Responsibility (OBR) said that borrowing would be £355bn for the year to April 2021, before falling back to £234bn over the following year.

It has to be said that borrowing costs are lower than ever (>1% interest to borrow for 10 years), however a 1% increase in interest rates would add about £21bn to the Government’s annual debt servicing costs.

Still, any borrowing costs will add to the total debt which will weigh on future generations until it’s paid off. This brings me to my final point: the inequitable impact of the pandemic on young people.

From an economic perspective, the pandemic has had a disproportionately negative impact on the under-25s.

That’s the age group with the highest job losses or furlough rates, given their heavy exposure to jobs in some of the worse-hit sectors, like hospitality or retail. The Institute for Employment Studies (IES) estimated that young people account for 46% of the overall fall in employment during the pandemic - even though they only account for just one in nine of the workforce.

We have to recognise that the long-term economic scarring in the labour market is likely to be less than in previous recessions, thanks to the enormous State intervention we have witnessed so far. However, will it be a case of “buy now, pay later” for our future generations?

Even before the pandemic, young people faced many challenges that the baby boomers’ cohort for example would not even have dreamt about. It’s not a matter of whether you have a defined benefit or a defined contribution pension, it’s more a case of save for a pension or save to buy a house – and let’s not get started on house prices.

Young people in England who go to university could already start their professional life with some £50,000 of student debt for a three-year course. Of course, some of it may never be paid back, but psychologically that’s a big burden to carry on your shoulders – as opposed to being paid to go to university, as was the case only a few decades ago.

The billions borrowed to get us through the pandemic will have to be paid back and the Government will have some tough choices to make.

The tightening of fiscal policy is not a card that has been played so far, but inevitably there will be less money available to spend on public services and/or higher taxes.

The biggest concern is that the pain of this crisis may not be fairly distributed and sadly young people may have to carry this burden for a very, very long time.