UK Borrowing Undershoots Again, but Warnings Sounded that the Trend Cannot Continue

Image © Gov.uk

The UK government borrowed significantly less money in July than had been expected, thanks to a combination of reduced spending and an uptick in tax receipts.

The government borrowed £10.4BN in July, which is less than the £11.09BN the market was expecting the government to borrow.

The figure makes a marked reduction on the £20.73BN spent in July 2020, according to new data from the ONS.

It is also far below the borrowing figure that was forecast by the Office for Budget Responsibility, at £15.6BN, suggesting the pressure on the Chancellor Rishi Sunak to substantially hike taxes in the Autumn is reduced.

Government earnings through tax receipts in July 2021 were estimated to have been £70.0BN, £9.5BN more than in July 2020, while central government bodies spent £79.8BN in July 2021, £2.9BN less than in July 2020.

Self-assessed Income Tax receipts were £8.5BN in July 2021, which is £3.7BN more than in July 2020.

Ruth Gregory, Senior UK Economist at Capital Economics says the tax takings are "another encouraging sign that the economic recovery is feeding through to the public coffers".

Public sector net borrowing was estimated to tally at £78BN in the financial year-to-July 2021; this was the second-highest financial year-to-July borrowing since monthly records began in 1993, but it is £61.6BN less than in the same period last year.

Above: Borrowing in the financial year ending March 2021 expressed as a percentage of gross domestic product has reached a level last seen at the end of World War Two. Source: Office for Budget Responsibility and Office for National Statistics – Public sector finances.

According to the ONS more than 50 schemes have been announced by the UK government and the devolved administrations to support individuals and businesses during the pandemic.

The extra funding required by these support schemes, combined with reduced cash receipts and a fall in GDP, have all helped push public sector net debt as a ratio of GDP to levels last seen in the early 1960s.

Estimates from Pantheon Macroeconomics suggest UK borrowing will total £175.3BN in 2021/22 if, as in the first four months, it continues to undershoot the OBR’s forecast by 25%.

But, looking ahead, Pantheon Macroeconomics expect the better-than-expected run of public sector finance data to end as they anticipate economic growth will disappoint.

The OBR predicted in March that GDP would rise by 3.0% quarter-on-quarter in the third quarter, then 3.3% in the fourth quarter and 1.1% in the first quarter of 2022. Pantheon forecast increases in GDP of 1.5%, 1.5% and 1.2%, respectively.

Furthermore, rising inflation will impact the debt interest payments the government will be required to make, while Pantheon Macroeconomics also expect extra health spending in the winter to combat another wave of Covid-19.