Economic rebound reduces hit to UK public finances

The UK’s public finances were in better shape than expected in May, as the economic rebound boosted tax receipts and limited government spending.

Public sector net borrowing, excluding public sector banks, was estimated at £24.3bn in May, the Office for National Statistics said on Tuesday.

The figure was £19.4bn lower than in May last year, and was better than the £28.5bn forecast by the Office for Budget Responsibility, following lower than expected borrowing in April.

This reflected “the improved economic outlook” said Michal Stelmach, senior economist at KPMG UK.

“The furlough scheme, which the OBR expected to cost nearly £50bn less this financial year, is likely to undershoot that forecast thanks to stronger demand for staff and some companies returning unused cash to the Exchequer,” added Stelmach.

However, it was still the second highest borrowing figure for May since monthly records began in 1993, as the pandemic continued to result in unprecedented public support to the economy.

Since the start of last year, at least 50 schemes have been announced by the UK government and the devolved administrations to support individuals and businesses during the pandemic. The extra spending, reduced tax receipts and a fall in GDP, have all helped push public sector net debt, or the borrowing accumulated over time, to around 99.2 per cent of GDP in May, the highest since March 1962, when debt was declining after the spike in the second world war.

Chancellor Rishi Sunak said that is was “important over the medium term to get the public finances on a sustainable footing”.

Provisional estimates of central government receipts in May were £56.9bn, which is £7.5bn more than in the same month last year, reflecting the reopening of many businesses and improved turnover.

Receipts rose across nearly all categories, with strong increases in fuel duties, following increased mobility as restrictions were eased, on value added tax as consumers consumption resumed, and tax on earnings resulting from more people being in work. Revenues from corporation tax were still down compared with May last year reflecting the “super deduction”, a measure that allows companies to offset the cost of plant and machinery against tax.

At the same time, central government bodies spent £81.8bn, down from the same month last year and lower than the OBR forecast as spending on subsidies to businesses and households declined compared with last year. That includes a £7.5bn drop in spending on the job retention scheme as many workers are returning from furlough leave as the economy reopened.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that public borrowing will continue to undershoot the OBR’s Budget forecast, given that GDP in 2021 likely will be about 3 per cent higher than expected this year. However, he noted that with rising retail price inflation the government will face higher interest payments.

Coupled with the likelihood of the extension of Covid-19 related spending into the next winter “we still think that the government will have to stick to plans to hike corporation tax in 2023 and to increase the effective income tax rate by freezing existing thresholds, if it wants to ensure that public borrowing declines below 4 per cent of GDP in the mid-2020s,” said Tombs.