UK public borrowing falls by more than expected

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Chancellor Rishi Sunak has been handed a boost ahead of next week’s Budget, with UK public borrowing falling by more than expected in September.

Public sector net borrowing was estimated to have been £21.8bn last month, data from the Office for National Statistics showed on Thursday. That was £7bn less than in September 2020, and also below the £25.9bn forecast in March by the Office for Budget Responsibility, the UK fiscal watchdog.

In the first half of the financial year, borrowing nearly halved to £108bn, £101bn less than in the same period last year.

Martin Beck, senior economic adviser to the EY ITEM Club said that the chancellor “certainly has some room for manoeuvre” at next week’s budget, given the economy has outperformed the OBR’s March forecast.

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However, Carl Emmerson, deputy director at the Institute for Fiscal Studies said that while the lower than expected borrowing “will doubtless please the chancellor”, what matters more “is the extent to which any improvement in borrowing persists beyond this year”.

The borrowing figure was still the second-highest for September since monthly records began in 1993, reflecting the large impact of the pandemic on public finances. Public debt — borrowing accumulated over time — was around 95.5 per cent of GDP, the highest since 1963, when it was coming down from the spike in the second world war.

Column chart of Financial year ending March, % GDP showing UK public borrowing has risen

Sunak said: “At the Budget and Spending Review next week I will set out how we will continue to support public services, businesses and jobs while keeping our public finances fit for the future.”

In September, Sunak announced a £12bn tax rise on workers and employers, starting next year, to fund health and social care. This suggests that “deficit reduction is his priority for the time being”, said Beck at EY, making the better than expected fiscal position “unlikely” to prompt a fiscal loosening.

Michal Stelmach, senior economist at KPMG UK also expects “the Budget to be broadly fiscally neutral” beyond some potential small giveaways. He explained that the Health and Social Care Levy is already expected to raise the tax take as a share of GDP to its highest level since 1950, setting a high bar for more tax and spend, while “rising inflation putting extra pressure on the cost of servicing government debt.”

Central government receipts were estimated at £62.3bn in September, which was £6.2bn more than in the same month last year and higher than the £58.5bn forecast by the OBR as the economic recovery boosted a broad-based increase in tax receipts with high annual rates of growth for business rates, pay as you earn tax and compulsory social contributions.

At the same time, central government bodies spent £84.1bn in September, £1.3bn less than in the same month last year as the costs of coronavirus support programmes fell.

Borrowing was lower than forecast despite increased spending for procurement, reflecting the costs of vaccines and NHS test and trace programme, and despite £4.8bn of interest payments on public debt, which was above the £3.2bn forecast by the OBR, following a rapid rise of the retail price inflation to which index-linked gilts are pegged.

September’s public finances figures mean that the chancellor “will be able to boast in next Wednesday’s Budget that he has reduced government borrowing much quicker than expected,” said Paul Dales, chief UK economist at Capital Economics, “but we suspect he’ll set himself some tight fiscal rules that will mean he won’t announce a major net giveaway next week”.

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