High government spending in the early months of 2019/20 and the change to how student loans are counted in August’s public finances data, combined with the spending increases announced in the Spending Round, suggests that the Chancellor’s fiscal target is dead in the water.
Student loans and spending pledges leave the fiscal target dead in the water
- High government spending in the early months of 2019/20 and the change to how student loans are counted in August’s public finances data, combined with the spending increases announced in the Spending Round, suggests that the Chancellor’s fiscal target is dead in the water.
- The biggest news was the implementation of a number of changes to the methodology and a revision to corporate tax receipts, which pushed up borrowing by £17.8bn, from £23.6bn (1.1% of GDP) to £41.3bn (1.9%). A change to how public sector pensions are presented added £1.3bn, revisions to corporation tax data contributed a further £2.6bn, but the main driver was a £12.4bn increase in borrowing due to a change in how student loans are treated. The ONS now treats a portion of student loans as spending rather than lending, reflecting the fact that much student debt is never repaid and eventually written off. (See our Update, “Student loans the last nail in the coffin of the fiscal rule”, 16th September)
- Regardless of the change to student loan accounting, borrowing in August fell to £6.4bn from £6.9bn the year before (consensus £6.5bn). Government spending was more or less unchanged, in part thanks to a £0.9bn fall in interest payments. Meanwhile, receipts were solid, up 3.4% y/y. (See Table 1.) Nonetheless, given high government spending in the prior months, borrowing is still up 28% in the year to date. If that trend persists, borrowing would be £52.8bn this year (2.4% of GDP). (See Chart 1.)
- That would be higher than the £40.6bn (accounting for the change in student loans accounting) the OBR predicted back in March. And hitting the fiscal rule in 2020/21 would require fiscal belt tightening to the tune of 0.5% of GDP. That’s not going to happen. The Chancellor has seen this coming and announced a review of the fiscal rules ahead of the Autumn Budget. A change to the rules will allow him to support the economy with fiscal stimulus. The upshot is that following 6 years of the deficit falling, it is now on the rise again.
Chart 1: PSNB Ex. Public Sector Banks (£bn)
Sources: Refinitiv, CE
Table 1: Public Finances (Borrowing Basis)
Taxes on income & wealth
PSNB ex. Public sector banks
Debt ex. Fin. Interventions
(% of GDP)
Andrew Wishart, UK Economist, +44 20 7808 4062, email@example.com