January’s poor borrowing figures are likely to set the tone for the next few months as the third COVID-19 lockdown keeps many businesses closed. But the Chancellor should resist the urge to try to reduce the budget deficit in the Budget on 3rd March and instead focus on continuing to support those areas of the economy that need it.
Third lockdown leads to highest January borrowing figure on record
- January’s poor borrowing figures are likely to set the tone for the next few months as the third COVID-19 lockdown keeps many businesses closed. But the Chancellor should resist the urge to try to reduce the budget deficit in the Budget on 3rd March and instead focus on continuing to support those areas of the economy that need it.
- The £8.8bn of public sector net borrowing (excluding banking groups) in January was lower than the consensus forecast of £24.0bn. Nonetheless, it was the highest January borrowing figure on record and the first January deficit for ten years. So it does not alter the big picture that borrowing is still soaring.
- Total tax revenues were only a little lower this January than last January, at £80.3bn versus £81.1bn. In fact, self-assessment income tax receipts rose from £15.4bn in January 2020 to £16.8bn. And receipts from income and wealth taxes increased from £6.7bn to £7.2bn. But this was more than offset by falls in VAT receipts and business rates, leaving total receipts 1.0% down on a year earlier. (See Table 1.)
- January’s deficit was mainly due to the 31.7% y/y leap in spending from £62.2bn in January 2020 to £81.9bn. (See Chart 1.) That reflected a £6bn increase on January 2020 in the amount transferred to local authorities. Meanwhile, the government spent £4.2bn on the furlough scheme and £0.8bn on the Self-Employment Income Support Scheme in January 2021.
- Borrowing has reached £270.6bn in the first ten months of the 2020/21 fiscal year, which is about £70bn below the OBR’s November forecast. Admittedly, the ONS has yet to include the estimated write-offs of government-backed loans. When it does, this could push up the deficit in 2020/21 by a further £30bn. But borrowing still looks on track to come in below the OBR’s November forecast and our forecast of £410bn (19.6% of GDP). What’s more, our optimistic view that the crisis won’t lead to big long-term scarring effects should allow the deficit to fall back to pre-virus levels by 2024/25 without the need for major tax rises. So the big risk is that the Chancellor withdraws the fiscal support too soon. (See here.) That could undermine the economic recovery and cause more problems for the public finances than it solves.
Chart 1: Central Government Expenditure & Receipts (% y/y)
Table 1: Public Finances (Borrowing Basis)
Taxes on income & wealth
Current Total Spending
PSNB ex. Public sector banks
Debt ex. Fin. Interventions
(% of GDP)
Ruth Gregory, Senior UK Economist, +44 (0)7747 466 451, email@example.com