The coronavirus pandemic has severely undermined Britain’s public finances with the government’s debt exceeding £2tn for the first time and borrowing at its highest ever peacetime level.
The Office for National Statistics on Friday reported that public sector net debt rose another £20.2bn to hit £2.004tn in July. It is now higher than the annual value of goods and services produced in the UK.
Although the rate of monthly borrowing was described by Ruth Gregory, senior UK economist at the consultancy Capital Economics, as “another huge sum”, it is lower than that expected by the Office for Budget Responsibility, the fiscal watchdog, with signs that better than expected consumer spending is supporting some tax revenues.
Chancellor Rishi Sunak used the rise in debt to more than £2tn to issue a warning that the extraordinary government support for the economy had to be time limited. “Today’s figures are a stark reminder that we must return our public finances to a sustainable footing over time, which will require taking difficult decisions,” he said.
The best measure of the deficit was still running at a very high level in July. The central government’s net cash requirement, the amount of cash it has had to raise to finance its activities, in the month was £25.5bn. This has deteriorated £33.6bn compared with the same month a year ago, when the government ran a surplus in July.
Since the start of the financial year in April, the cash requirement has hit £199.5bn, a figure higher than the previously worst full year, in 2009/10. But the level of recorded borrowing is running at a rate almost £30bn below that forecast by the OBR, which has estimated the government will borrow more than £370bn in the full 2020/21 financial year.
Samuel Tombs, UK economist at the consultancy Pantheon Macroeconomics, said the deficit was still on course to hit its highest level as a share of national income since the second world war, but there had been some unexpected silver linings in the public finance numbers.
“The better than expected figures largely are due to resilience in value added tax receipts — driven partly by recent strength in retail sales — which came in at £13.3bn in July, well above the OBR’s £9bn expectation,” he said.
Howard Archer, chief economic adviser to the EY Item Club, said the figures provided evidence of a continued rebound in economic activity. “The lower deficit in July reinforces belief that the economy likely saw further marked improvement over the month,” he said.
Over the first four months of the financial year, cash receipts paid to the exchequer were down 29.4 per cent compared with the same months in 2019-20, while cash spent by central government was 54.3 per cent higher than in the same period last year.
Latest coronavirus news
Follow FT’s live coverage and analysis of the global pandemic and the rapidly evolving economic crisis here.
The resulting central government net cash requirement of £199.5bn over four months compared with a cash deficit of only £10.3bn at the same point in 2019-20.
In the months ahead there are likely to be significant revisions to the public finance figures as the government works out what it has spent and how much money it has collected.
The ONS will need to adjust the borrowing figures upward to take account of expected taxpayer losses on billions of pounds of loans to businesses backed by government guarantees. It will also need to adjust the tax and spending data to reflect many temporary changes in the timings of payments, such as the VAT deferral scheme.
Source: Economy - ft.com
