Government Borrowing: Sunak Still Undershooting Forecasts, but it's Going to Get Tougher says Economist

- UK borrowing undershoots again
- Providing some breathing room ahead of Autumn budget
- But rising inflation means good news will soon end

Above: File image of Rishi Sunak. Image © Pound Sterling Live, Image courtesy of Parliament.tv

The UK government added to its growing debt pile in September, however borrowing for the current financial year is still far below the levels forecast by the Office for Budget Responsibility thanks to an ongoing improvement in tax takings.

These will be the final public sector finances before the Treasury reveals its Autumn Budget and Spending Review on October 27 with the estimate of borrowing in the first five months of this fiscal year was revised down to £86.3BN, from £93.8Bn previously.

Public Sector Net Borrowing was at £21.80BN in September says the ONS, which is slightly less than the £22.60BN economists were expecting and higher than August's £16.06BN.

This makes for the second-highest September borrowing since monthly records began in 1993, £7.0 billion less than in September 2020.

The Government collected £62.3BN in September, which is £6.2BN more than it did in September 2020.

Adding to the government's coffers were a surge in stamp duty - takings were up 78.3% on the year - as the temporary stamp duty on property purchases came to an end.

Self-Assessed Income Tax takings also recovered, rising by 82.9% on the same time last year.

Spending was at £84.1BN in September 2021, £1.3BN less than in September 2020.

Borrowing is seen at £108.1BN in the financial year-to-September 2021 making this the second highest financial year-to-September borrowing since monthly records began in 1993.

It is however £101.2BN less than in the same period last year.

The total public sector net debt - excluding public sector banks - was £2,218.9BN at the end of September 2021 or around 95.5% of gross domestic product (GDP), the highest ratio since the 98.3% recorded in March 1963.

Despite the eye watering debt being accumulated by the government, it remains set to undershoot the borrowing estimates set out by the Office for Budget Responsibility in their Economic and Fiscal Outlook published in March.

This means Chancellor Rishi Sunak will enter the Autumn Budget and Spending Review with a great deal more leeway on borrowing than had initially been anticipated.

"While still high by historical standards, UK borrowing needs are not as severe as the government was expecting towards the start of the year, but expect the Chancellor to bank these improvements and avoid an unexpected spending sprees," says Paul Galooly, Director at Now Loan.

"The UK economy looks set to comfortably exceed its growth and revenue forecasts for this year, while spending should undershoot," says Elizabeth Martins, Senior Economist at HSBC Bank plc.

"We expect the OBR to revise down its borrowing projection for 2021/22 by almost £40bn," says Martins.

Samuel Tombs, UK Chief Economist at Pantheon Macroeconomics warns the good news will end soon as debt interest payments soar in response to higher inflation.

Indeed, Pantheon Macroeconomics cite three reasons to think that borrowing in the second half of this fiscal year will broadly match the level anticipated by the OBR in the March Budget:

1) The gap between the OBR’s forecast for GDP in March and its actual level will shrink as growth slows. Back in March the OBR predicted that GDP would rise by 3.0% quarter-on-quarter in Q3, then 3.3% in Q4 and 1.1% in Q1. Pantheon anticipate increases in GDP of 1.5%, 1.2% and 1.0%, respectively.

2) The outlook for further hefty month-to-month increases in the Retail Price Index, due to higher energy prices and a jump in the rate of VAT for hospitality businesses, suggests that debt interest payments this year will be £15.5BN higher than the OBR predicted in March.

3) The government announced last month a £5.4BN cash injection for the NHS over the next six months.

"All told, then, we think that public borrowing is on course to total about £190B this year, well below the £234B estimate in the March Budget, but above the £167B figure implied by a simple extrapolation of the year-to-date trend," says Tombs.