Public Finances (Jun.) - Capital Economics
UK Economics

Public Finances (Jun.)

UK Data Response
Written by Ruth Gregory

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)

Total receipts

(% y/y)

Taxes on income & wealth

(% y/y)

VAT

(% y/y)

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)

Mar.

8.1

9.5

5.7

2.3

2.5

3.7

-0.9

23.5

83.0

Apr.

2.8

2.3

4.0

4.1

3.6

4.8

6.3

6.3

82.6

May

4.4

3.6

5.7

2.7

0.7

5.0

4.5

10.8

82.8

Jun.

1.5

1.4

1.2

7.0

0.8

5.1

7.2

17.9

83.1

Source: Refinitiv


Ruth Gregory, Senior UK Economist, +44 20 7811 3913, ruth.gregory@capitaleconomics.com