Government borrowing shows little sign of easing off
- Monthly borrowing in September was the third highest on record, only exceeded by that in April and May when the pandemic and the fiscal response were at their height. With the recovery stuttering and further fiscal support likely, we doubt that borrowing will slow much in the second half of the fiscal year.
- The £36.1bn of public sector net borrowing (exc. Banking groups) in September (up from £7.7bn in September 2019) was above the consensus forecast of £33.6bn and left borrowing in the year to date at £208.5bn. (See Table 1.) So in just the first six months of the fiscal year, the government has borrowed four times what it did in the whole of 2018/19. And the debt to GDP ratio rose from 101.5% in August to 103.5% in September, its highest since 1960.
- Despite this, borrowing in the year to date was still 21% below the Office for Budget Responsibility’s (OBR) most recent projection. That is partly because the ONS hasn’t yet incorporated any provision for loan losses on the Coronavirus Business Interruption Loan scheme and Bounce Back Loan scheme into the figures. But it is also because the initial economic recovery was stronger than the OBR anticipated.
- However, there is little sign of the increase in spending and fall in receipts getting smaller. (See Chart 1.) With the recovery petering out, a strong rebound in tax receipts looks unlikely in the months ahead either. And while the government will make its last payments to workers on furlough through the Coronavirus Job Retention Scheme in October, the new Job Support Scheme, which includes furlough payments for staff of businesses forced to close, will begin. And with the virus continuing to force more areas into tier 3 lockdowns, the government is more likely to increase fiscal support further than scale it back.
- As a result, the pace of borrowing is unlikely to slow much in the second half of the fiscal year. We expect the deficit to reach £390bn this year (19.6% of GDP) some £18bn more than the OBR’s £372bn projection. As a proportion of GDP, that would be the highest deficit since WWII. But with more QE on the way and 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. We expect the 10-year yield to be 0.15% at year-end.
Chart 1: Central Government Expenditure & Receipts (% y/y)
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 (0)7427 682 411, firstname.lastname@example.org