June’s public finances figures continued the underlying deterioration in the fiscal position evident since the beginning of the financial year and provided a timely reminder that the next Prime Minister won’t get a free “fiscal lunch” in the next Budget whether that’s before or after Brexit.
Heading off track
- June’s public finances figures continued the underlying deterioration in the fiscal position evident since the beginning of the financial year and provided a timely reminder that the next Prime Minister won’t get a free “fiscal lunch” in the next Budget whether that’s before or after Brexit.
- Public sector net borrowing (excluding public sector banks) of £7.2bn in June was well above the consensus expectation of £3.9bn and last June’s figure of £3.3bn. (See Table 1.) At least the 2018/19 full-year’s borrowing total was revised down from £24.0bn to £23.5bn. And borrowing was revised down in April and May 2019 too – by £1.1bn in total.
- Nonetheless, borrowing in the first three months of the current fiscal year, of £17.9bn, was still £4.5bn higher than at the same point last year. By contrast, the OBR has assumed that borrowing would rise by roughly £2.4bn in the full fiscal year. So if this trend were to persist over the remaining nine months of the fiscal year, PSNB ex. would overshoot the OBR’s 2019/20 forecast of £29.3bn by £2.1bn. (See Chart 1.)
- Admittedly, a fair chunk of the deterioration in June can be attributed to a £2.1bn surge in debt interest payments, thanks to past rises in RPI inflation to which index-linked bonds are pegged. But the overshoot in borrowing relative to the official forecasts may also reflect the recent economic weakness. Indeed, annual growth in tax receipts of 1.5% fell well short of the OBR’s forecast of 2.9% for the year as a whole. Meanwhile, 7.0% annual growth in central government current expenditure in June exceeded the OBR’s full-year estimate of a 2.7% rise.
- Further bad news for the new PM is on the way in September as a change in the accounting treatment of student loans will raise the borrowing by more than £10bn a year. And yesterday’s report by the OBR showing that a no deal would push up borrowing by a further £30bn a year could remove the room for tax cuts/spending rises in that scenario. But we doubt the OBR’s warning will prevent Johnson/Hunt from pursuing a no deal or loosening the purse strings. Ultimately, a loosening in fiscal policy seems to be on the way. How far borrowing rises will depend on whether there is a deal, a no deal, or a delay.
Chart 1: PSNB Ex. Public Sector Banks (Cumulative, £bn)
Source: Refinitiv, OBR, CE
Table 1: Public Finances (Borrowing Basis)
Taxes on income & wealth
PSNB ex. Public sector banks
Debt ex. Fin. Interventions
(% of GDP)
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, email@example.com