Public Finances (Oct.) - Capital Economics
UK Markets

Public Finances (Oct.)

UK Data Response
Written by Ruth Gregory

October’s public finances figures were far better than expected. But the likely economic contraction in November and extension of the government’s support measures mean that the better news won’t last.

Better news on government borrowing won’t last

  • October’s public finances figures were far better than expected. But the likely economic contraction in November and extension of the government’s support measures mean that the better news won’t last.
  • The £22.3bn of public sector net borrowing (exc. banking groups) was lower than the consensus forecast of £37.2bn and brought encouraging signs that the increase in spending and fall in receipts are getting smaller. (See Chart 1.) Borrowing in August and September was also revised down, from £30.1bn to £24.4bn and from £36.1bn to £28.6bn respectively, reflecting stronger tax receipts and lower expenditure.
  • Meanwhile, borrowing in the year to date is still 26% below the Office for Budget Responsibility’s (OBR) July projection (to be updated next Wednesday), reflecting the much swifter rebound in economic activity in Q3 than the OBR anticipated.
  • Even so, this doesn’t alter the big picture that borrowing is still soaring. This was still the biggest October borrowing figure on record and the sixth highest figure in any month. In the first seven months of the fiscal year, borrowing has already reached £214.9bn, £57bn above that in the whole of 2009/10 (the worst year on record in cash terms). (See Table 1.) And while the debt to GDP ratio slipped from 101.2% of GDP in September to 100.8% in October, it isn’t far off September’s 59-year high.
  • Moreover, the current lockdown means that government borrowing will probably increase even more sharply in the coming months. Indeed, given the likely contraction in GDP in November, the recent rebound in tax receipts won’t be sustained. And the government’s extension of the furlough scheme could cost the Exchequer a further £14.0bn, perhaps bringing the total cost of the scheme to about £63.5bn (3.3% of GDP). The third Self Employment Income Support Scheme grant could also cost another £5bn.
  • Overall, we expect the deficit to reach about £420bn (21.7% of GDP) in 2020/21, its highest since WWII. But with interest rates set to stay very low for the foreseeable future, we don’t think that will cause an adverse reaction in the gilt market or require the government to raise taxes soon. We expect the 10-year yield to be 0.50% at year-end.

Chart 1: Central Government Expenditure & Receipts (% y/y)

Source: Refinitiv

Table 1: Public Finances (Borrowing Basis)

Total receipts

(% y/y)

Taxes on income & wealth

(% y/y)

VAT

(% y/y)

Current 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)

Jul.

-10.0

-16.6

-10.1

21.1

11.2

32.6

21.2

139.6

97.5

Aug.

-4.8

-0.4

-5.6

25.2

7.1

37.4

24.4

164.0

99.3

Sep.

-7.2

-0.2

-7.7

23.6

10.5

25.1

28.6

192.6

101.2

Oct.

-2.8

3.0

-11.7

9.9

9.9

22.5

22.3

214.9

100.8

Source: Refinitiv


Ruth Gregory, Senior UK Economist, +44 (0)7747 466 451, ruth.gregory@capitaleconomics.com