Record deficit ahead with no end to borrowing in sight

Tim Wallace
·2-min read
Budget briefcase
Budget briefcase

Britain is in for a record year of borrowing, and the economic recovery to date is not going to stop that.

Indeed, despite the rebound over the summer, September was a bigger month for borrowing than any since May, making it the third biggest on record.

In six months the deficit has hit £208bn. Back at the height of the financial crisis the Government borrowed £157.7bn in the biggest year, so even if no more borrowing was required at all in the coming months, the Treasury would still have overtaken that record by more than £50bn.

It takes the national debt well above £2 trillion and to more than 103pc of GDP, the highest in decades.

Spending surge

The biggest cause for the surge is rising spending. With much of the population still under orders to curtail activity, and others staying at home of their own volition to avoid the virus, extra cash is on offer to businesses, workers, and services such as the NHS.

Total spending in the month was more than £90bn, compared to £71.2bn a year earlier.

Tax slump

At the same time tax revenues slumped, though not nearly as fast as spending surged. 

Total Government revenues were £55.1bn last month, down from £63.5bn in September 2019.

Much of this is due to weaker economic activity. GDP was around 9pc lower in August than it was before the pandemic, so there is less activity to tax.

But some of this is deliberate. The Government has suspended stamp duty on the first £500,000 of property sales, cut VAT in hospitality and lowered some business rates bills.

It means frenzied activity in the housing market, for instance, is translating into only modest revenues for the Treasury.

Cause for hope….

These are initial estimates from the ONS. Not all of the data is yet available, so the numbers will be revised in the months ahead.

So far, the pattern has been one of downward revisions. For instance, the ONS now thinks the Treasury borrowed £30.1bn in August, down from its initial estimate of £35.9bn.

Better than expected numbers mean borrowing to date has been around 20pc below that forecast by the OBR, which predicted borrowing of £372bn for the financial year as a whole.

...outweighed by fear of what is coming

That does not mean the coming months will be the same, however.

New lockdowns mean a slower recovery, potentially even going into reverse with a double dip for GDP.

That means lower tax revenues, more Government spending and so more borrowing.

Economists at the EY Item Club expect the deficit for the year to come in at around £365bn, just shy of the OBR’s prediction.

Capital Economics thinks £390bn is more likely, given the likely scale of the slowdown.