Bor­row­ing hits record £128bn in just one quar­ter

Bri­tain’s quar­terly deficit is dou­ble the whole of last year’s as Covid costs and fall­ing tax rev­enues bite

The Daily Telegraph - Business - - Front Page - By Tim Wal­lace

BOR­ROW­ING by the UK state rock­eted to a record £127.9bn in the three months to June as the pub­lic fi­nances were wrecked by fall­ing tax rev­enues and a spend­ing spree to fight Covid-19.

The quar­terly deficit is the largest since mon­i­tor­ing started in 1993, the Of­fice for Na­tional Sta­tis­tics said, and dou­ble the en­tire level of bor­row­ing for the pre­vi­ous fi­nan­cial year.

It dwarfs even the worst days of the fi­nan­cial cri­sis and is likely to spark fears of bru­tal cuts and mas­sive tax rises ahead as Rishi Su­nak, the Chan­cel­lor, launches a de­part­men­tal spend­ing re­view.

In June alone the Trea­sury bor­rowed £35.5bn, mak­ing it the third-big­gest month of bor­row­ing ever. The only two big­ger months were April, at £46.9bn, and May, at £45.5bn.

The na­tional debt now to­tals £1.98 tril­lion, or 99.6pc of GDP – its high­est level since the Six­ties.

This surge in debt has been trig­gered by un­prece­dented ef­forts to pro­tect the econ­omy from melt­down as Covid hit and busi­ness were or­dered to close. Of the £80.5bn spent in June, al­most £10bn went on the fur­lough scheme and sup­port for self-em­ployed peo­ple un­able to work.

So far the schemes have cost £37.6bn, cov­er­ing 9.5m em­ploy­ees and 2.7m who work for them­selves.

At the same time tax rev­enues plunged by a fifth. VAT re­ceipts were cut al­most in half, tum­bling to a decade low of £7.1bn for June. Com­pa­nies had the op­tion of de­fer­ring VAT pay­ments for the sec­ond quar­ter, hit­ting rev­enues but hope­fully boost­ing their prospects for longer-term sur­vival. Those num­bers are based on the ex­pec­ta­tion that de­ferred bills will be paid later this year. In terms of cash paid to HMRC so far and once VAT re­pay­ments are counted, net do­mes­tic VAT re­ceipts were mi­nus £744m in June.

This is the third con­sec­u­tive month in which more money was paid out than re­ceived on VAT.

Cor­po­ra­tion tax re­ceipts fell by al­most a fifth to £3.7bn, while pay as you earn in­come tax slipped by 1.6pc, to £13.6bn as many fur­loughed work­ers had a 20pc pay cut. With pubs closed un­til July, al­co­hol duty brought in just over £700m, down 25pc on June 2019.

Fuel duty and stamp duty on prop­erty sales were both down by al­most a third, though in each case that is an im­prove­ment on the drop of more than 50pc suf­fered in May as ac­tiv­ity re­turned to the na­tion’s roads and its hous­ing mar­ket.

Econ­o­mists be­lieve the Chan­cel­lor, will an­nounce more spend­ing later in the year, push­ing the deficit up even fur­ther. The In­sti­tute for Fis­cal Stud­ies (IFS) has warned the Trea­sury could take on £500bn of ex­tra debt over this year and next.

Ben­jamin Nabarro, economist at Citi, ex­pects an­other £25bn to be spent in the au­tumn through in­come tax cuts, more sup­port on busi­ness rates and jobs and an ex­pan­sion of debt re­lief for firms which were forced to take out emer­gency loans.

Even­tu­ally more con­trol of the purse strings will be re­quired. Mr Su­nak has hinted this could in­volve tighter budg- ets for some de­part­ments in a spend­ing re­view un­veiled yes­ter­day.

Ben Zaranko, of the IFS, said: “Given the large amounts al­ready promised for pri­or­ity ar­eas like the NHS, schools and po­lice, and Rishi Su­nak’s em­pha­sis on the need for ‘tough choices’, an­other round of bud­get cuts for other, lower pri­or­ity de­part­ments is a very real pos­si­bil­ity.”

Rishi Su­nak is bor­row­ing hand over fist; in fi­nan­cial terms he has be­come a wartime Chan­cel­lor. Just three months into this fi­nan­cial year he’s bor­rowed £128bn.

Al­ready this means the na­tional debt is now al­most pre­cisely equal in size to GDP, more than oblit­er­at­ing the Coali­tion and Con­ser­va­tive gov­ern­ments’ ef­forts to bring the fi­nances un­der con­trol. Debts have not been this high since the Six­ties.

An­a­lysts at Pan­theon Macroe­co­nomics now think this year’s bor­row­ing could amount to 20pc of GDP, dou­ble the deficit at the peak of the fi­nan­cial cri­sis. The last time it was higher was 1945. In cash terms that is likely to be around £370bn this year. The In­sti­tute for Fis­cal Stud­ies pre­dicts bor­row­ing of £150bn next year, which means a to­tal of £520bn.

The ob­vi­ous cul­prits for the bor­row­ing spike in­clude the huge spend­ing measures. But the lack of eco­nomic ac­tiv­ity also crushed Gov­ern­ment rev­enues. If house­holds are not spend­ing, there is lit­tle eco­nomic ac­tiv­ity to tax.

VAT re­ceipts for June are ul­ti­mately ex­pected to fall by around 45pc, an enor­mous drop. But that re­lies on all of those busi­nesses that have taken up the Gov­ern­ment’s of­fer of pay­ment de­fer­ral ac­tu­ally pay­ing the tax. If they go bust, the rev­enue may never ap­pear. HMRC has re­ported rev­enues are down more than 85pc. That is be­cause it is still pay­ing its reg­u­lar re­funds to busi­nesses, but re­ceiv­ing very lit­tle new VAT in­come.

On this cash ba­sis the usual haul of more than £8bn has been re­duced to just £1.1bn. When look­ing only at do­mes­tic trans­ac­tions, not im­ports, HMRC has paid out more than it re­ceived, by £744m. That is the third such month in a row of net re­pay­ments. Other con­sump­tion taxes have also plunged, in­clud­ing al­co­hol and fuel du­ties. Stamp duty on home sales is through the floor, too.

One sav­ing grace is that the Gov­ern­ment is still bor­row­ing ex­tremely cheaply. Sev­eral times now it has is­sued bonds with neg­a­tive yields, mean­ing the Trea­sury will pay back less than it bor­rowed.

Last month it paid £2.7bn of in­ter­est on its debts, down by al­most twothirds on the amount paid a year ear­lier. This is the con­tin­u­a­tion of an on­go­ing trend. Last year the Gov­ern­ment’s debt in­ter­est pay­ments soaked up 3.7pc of its rev­enues, down from just over 5pc a decade ago and the low­est level on records dat­ing back to the Sec­ond World War.

But not every cost is in­cluded in the lat­est num­bers. Su­nak’s lat­est stim­u­lus bill has not yet landed, ei­ther for the spend­ing or tax cuts an­nounced ear­lier this month, and econ­o­mists ex­pect him to of­fer more spend­ing in the au­tumn. Even some of the big pack­ages an­nounced in the spring have not yet landed him with large costs, but they could yet do so.

The Gov­ern­ment has guar­an­teed more than £48bn of loans by banks to busi­nesses. If a sig­nif­i­cant share are not re­paid, it could land the Trea­sury with an ex­tra bill of tens of bil­lions.

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