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
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.