July saw the fourth biggest monthly deficit in history behind only the first three months of this fiscal year. A massive increase in debt to over £2 trillion for the first time ever and above 100% of GDP for the first time since 1961 has resulted. But extremely low borrowing costs will allow the government to support the next stage of the recovery too.
Rise in debt ratio beyond 100% unlikely to panic the Chancellor
- July saw the fourth biggest monthly deficit in history behind only the first three months of this fiscal year. A massive increase in debt to over £2 trillion for the first time ever and above 100% of GDP for the first time since 1961 has resulted. But extremely low borrowing costs will allow the government to support the next stage of the recovery too.
- The £26.7bn the government borrowed in July was the lowest monthly borrowing figure since March, reflecting recovering tax receipts as the economy continued to bounce back from the April trough in activity. (See Chart 1.) Nonetheless, it is still a huge sum and the worst July on record. Compared to July 2019, central government receipts were down by 16.7% and expenditure up by 22.5%.
- Much of the tax receipts data for the latest month is based on Office for Budget Responsibility (OBR) projections. So it was encouraging that borrowing in June was revised down by £6.0bn from £35.5bn to £29.5bn due to higher actual receipts than the OBR had expected. That is another sign that the initial stage of the recovery has been a bit swifter than we and most other economists anticipated.
- Nonetheless, borrowing in the first four months of the fiscal year was £150.5bn, close to the deficit for the whole of 2009/10 of £158.3bn, which was previously the largest cash deficit in history. That reflects the extraordinary scale of fiscal support the government has put in place to see the economy through this crisis.
- The huge amount of borrowing the government has undertaken pushed debt up beyond two big milestones in July. In cash terms, public sector net debt excluding public sector banks exceeded £2 trillion for the first time, with £227.6 billion of that debt accumulated in the last year. The debt also surpassed 100% of GDP for the first time since 1961, reaching 100.5% of GDP up from 80.1% a year earlier. Note that this is partly due to the huge plunge in GDP this year.
- The surge in debt has not rattled the bond market, where extremely loose monetary policy has anchored gilt yields close to record lows. And the government’s expenditure on debt interest is still falling. That will allow the Chancellor to continue to support to the economy in the Autumn.
Chart 1: Government Tax Receipts & Expenditure (Borrowing Basis, £bn)
Sources: Refinitiv, OBR, CE
Table 1: Public Finances (Borrowing Basis)
Taxes on income & wealth
Current Total Spending
PSNB ex. Public sector banks
Debt ex. Fin. Interventions
(% of GDP)
Andrew Wishart, UK Economist, +44 7427 682 411, email@example.com