The worst October for the public finances for five years won’t prevent whoever wins the election embarking on a fiscal splurge. Borrowing appears to have been higher than expected due to Brexit preparations, and leaves the budget deficit on track to rise for the first time in a decade this year. The investment plans laid out by the major parties suggest it will rise substantially further in 2020/21.
Brexit preparations force spending higher
- The worst October for the public finances for five years won’t prevent whoever wins the election embarking on a fiscal splurge. Borrowing appears to have been higher than expected due to Brexit preparations, and leaves the budget deficit on track to rise this year. The investment plans laid out by the major parties suggest it will rise substantially further in 2020/21.
- The government borrowed £11.2bn in October, up from £8.9bn last October (consensus £9.3bn). The increase was partly due to soft receipts, which were up just £0.2bn y/y but mainly because of higher departmental spending, which rose by £2.4bn y/y. (See Table 1.) We suspect the increase in departmental spending reflected Whitehall preparing for a possible no deal Brexit at the end of the month.
- Year-to-date borrowing was helped by a downward revision to borrowing in previous months. But the current budget deficit (i.e. excluding investment spending) is still up £3.3bn in the fiscal year so far, and in danger of wiping out the £5bn surplus recorded in 2018/19. That will concern the Chancellor who has promised to balance the current budget by 2022/23 if the Conservatives win the election. Promises to raise day-to-day spending will have to be offset by higher tax if the Conservatives want to stick to their new fiscal rule, so it makes sense that on Tuesday the Prime Minister scratched a planned cut in corporation tax.
- The overall budget deficit is up £4.3bn (10%) year-to-date. Assuming that trend is sustained the deficit will rise this year, bucking the downward trend since 2009/10, perhaps from £41bn (1.9% of GDP) in 2019/19 to £45bn (2.2%). (See Chart 1.) The main parties generous investment plans suggest the deficit will continue to rise thereafter. That’s where the fiscal stimulus that will probably support the economy over the next few years will be focussed.
- We doubt the fact the deficit is on the rise again will concern gilt investors much. Low long-term interest rates mean governments can now service much larger debt piles than in the past. Indeed, we doubt even Labour’s investment and nationalisation plans would lead to a large rise in gilt yields. (See here.)
Chart 1: Public Sector Net Borrowing Excluding Public Sector Banks (£bn)
Sources: Refinitiv, ONS, 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 20 7808 4062, email@example.com