Public Finances (Apr.) - Capital Economics
UK Economics

Public Finances (Apr.)

UK Data Response
Written by Ruth Gregory

The double whammy of the precipitous fall in economic activity and the government’s measures to combat the crisis has already pushed borrowing to alarmingly high levels. While the small easing of the lockdown on 13th May probably meant the government did not have to borrow quite as much this month as in April, it’s clear the government will still have to borrow a few hundred billion pounds this year.

Government borrowing skyrockets

  • The double whammy of the precipitous fall in economic activity and the government’s measures to combat the crisis has already pushed borrowing to alarmingly high levels. While the small easing of the lockdown on 13th May probably meant the government did not have to borrow quite as much this month as in April, it’s clear the government will still have to borrow a few hundred billion pounds this year.
  • Borrowing (on the PSNB ex. public sector banks measure) came in at an eye-watering £62.1bn in April, the highest April figure since records began in 1993, almost six times last April’s figure, and far worse than the £40bn increase expected by the consensus (CE forecast £67bn). Total tax receipts were down by an enormous 26.5% y/y in April. Of that, income tax receipts were down by 30.3% y/y, corporation tax down by 14.1% y/y and VAT down by 43.6% y/y. Total expenditure rose by 56.6% y/y, which shows the scale of the government’s response to the crisis including increased spending on the NHS and its other policies such as the Coronavirus Job Retention Scheme. (See Table 1.)
  • Borrowing in March 2020 was also revised up by £11.7bn, from £3.1bn to £14.7bn, due to a reduction in the previous estimate of tax receipts and new estimates of spending on the Coronavirus Job Retention Scheme. That left borrowing in the 2019/20 fiscal year at £62.7bn, up from £48.7bn previously. That means borrowing in April 2020 alone reached the same level as during the whole of 2019/20.
  • The alternative Central Government Net Cash Requirement (CGNCR) measure of borrowing is more timely since it is based on actual cash received rather than accruals. As a result, it does not rely on forecasts of tax receipts in the same way as the PSNB figures. This measure came in higher still, at £63.5bn, the highest cash requirement in any month since records began in 1984.
  • While the government may not have to borrow quite as much in the coming months, we still expect borrowing to total £340bn (17.5% of GDP) in 2020/21, over £40bn more than the OBR’s forecast. (See Chart 1.) Even so, against the backdrop of low interest rates and given the Bank of England’s willingness to hoover up gilts, higher levels of government debt will be manageable. As a result, a prolonged period of austerity, like after the 2008/09 financial crisis, won’t necessarily follow this crisis.

Chart 1: Public Sector Net Borrowing Excluding Public Sector Banks

Sources: Refinitiv, OBR, CE

Table 1: Public Finances (Borrowing Basis)

Total receipts

(% y/y)

Taxes on income & wealth

(% y/y)

VAT

(% y/y)

Current Total Spending

(% y/y)

Social benefits

(% y/y)

Dep. Spending

(% y/y)

PSNB ex. Public sector banks

Debt ex. Fin. Interventions

(% of GDP)

(£bn)

(Cum. £bn)

Jan.

2.3

3.8

-5.4

5.2

4.1

5.2

-9.4

46.4

89.9

Feb.

0.7

0.0

-3.7

0.2

2.5

0.6

1.5

47.9

91.2

Mar.

-7.1

-12.9

-4.0

23.9

1.4

30.3

14.7

62.7

93.3

Apr.

-26.5

-30.3

-43.6

56.6

8.8

89.9

62.1

62.1

97.7

Source: Refinitiv


Ruth Gregory, Senior UK Ecnomist, + 44 7747 466 451, ruth.gregory@capitaleconomics.com