The public finances figures showed that borrowing undershot the Office for Budget Responsibility’s (OBR) March forecast again in June, reinforcing our view that the economy can do more of the job in “fixing” the public finances than a fiscal tightening.
The £22.8bn of public sector net borrowing (excluding banking groups) in June was a little above the consensus forecast of £20.0bn, but it was £5.5bn lower than in June last year and below the OBR’s forecast of £25.2bn.
There were more signs that the strong economic recovery is starting to feed through into lower government borrowing. Total tax receipts of £62.2bn in June were well above May’s (upwardly revised) £59.5bn and last June’s £52.7bn. And the trend in tax receipts should continue to improve over the rest of the year as stronger GDP growth than anticipated by the OBR boosts the public coffers. However, current expenditure jumped from £75.8bn in May to £77.9bn in June.That reflected an unexpected rise in spending on the furlough scheme (£2.2bn in June, up from £1.9bn in May). And the rise in RPI inflation in April 2021 meant that debt interest payments rose by £8.7bn. That was the highest monthly payment since the series began in 1997.
But while debt service costs will probably stay higher than the OBR estimated over next few years, the public finances should continue to reap the benefits of a faster and fuller recovery in GDP than the OBR expects, meaning that the deficit should still fall faster. That said, we suspect the Chancellor will “bank” any improvement in the deficit rather than scale back the planned tax hikes and spending cuts set to hit the economy. At least by 2022/23, the economy should be strong enough to cope with it.
Ruth Gregory, Senior UK Economist, email@example.com