Public Finances (Aug.) - Capital Economics
UK Economics

Public Finances (Aug.)

UK Data Response
Written by Andrew Wishart

The government borrowed another huge sum of £35.9bn in August as it continued to absorb much of the cost of the COVID-19 crisis. But while the Chancellor announced some modest further support yesterday, the big picture is that fiscal support will fade over the autumn causing many more job losses to be realised.

Fiscal support to fade in the autumn

  • The government borrowed another huge sum of £35.9bn in August as it continued to absorb much of the cost of the COVID-19 crisis. But while the Chancellor announced some modest further support yesterday, the big picture is that fiscal support will fade over the autumn causing many more job losses to be realised.
  • The £35.9bn the government borrowed in August (up from £5.4bn in August 2019) left borrowing in the year to date at £173.5bn. (See Table 1.) That’s already the highest cash figure on record with seven months of the financial year still to go (the previous record was £158.3bn in 2009/10).
  • Of course, the government was always expected to borrow a huge sum this year as tax revenues were hit by the plunge in economic activity and the government stepped in to support household and business incomes. Borrowing in the year to date is actually 22% below the OBR’s July projection due to both stronger tax receipts and lower expenditure than it anticipated. (See Chart 1.) If that continued, the government would borrow £290bn this year (14% of GDP).
  • While the ONS warned that COVID-19 could lead to larger revisions than normal, higher tax receipts than in the OBR’s projection probably reflects the much swifter rebound in activity in Q3 than anticipated. While the OBR forecast an 13% q/q rise in GDP in Q3, we suspect it rose by 18% q/q.
  • However, after an impressive rebound in Q3, we think the resurgence of the virus and new restrictions will cause GDP to stagnate for the rest of this year, hurting tax revenues. While Gfk consumer confidence rose from -27 to -25 in September (still well below its pre-virus level of -13), it could well start to fall again.
  • Moreover, the Chancellor confirmed a further £24.3bn of spending on public services yesterday. And the Government’s new Job Support Scheme and the extension of the VAT cut for hospitality/tourism announced yesterday may add up to £10bn to the cost of direct support. The result could be that the Chancellor ends up borrowing a whopping £370bn (18.4% of GDP) in 2020/21, pushing up the debt to GDP ratio from 88.4% in 2019/20 to 102% in 2020/21. But with the recovery stuttering and no sign of concern in the gilt market, the government is right to have refocussed on supporting the economy rather than raising taxes.

Chart 1: Central Government Current Receipts & Expenditure (£bn Cumulative YTD)

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)

May

-11.0

-4.6

-17.2

49.3

8.4

72.9

44.3

93.3

96.1

Jun.

-10.3

-10.4

-23.4

23.1

10.9

45.2

28.9

122.3

98.7

Jul.

-13.0

-19.7

-25.7

10.2

7.9

17.5

15.4

137.7

100.1

Aug.

-14.3

-10.7

-28.5

33.0

9.1

48.7

35.9

173.7

101.9

Source: Refinitiv


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com