Press release

20 Dec 2019 London, GB

UK public finances saw modest deterioration in November

The November public finances figures showed modest year-on-year deterioration; this marked the sixth time in the first eight months of fiscal year 2019/20 that they had been weaker.

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  • The November public finances figures showed modest year-on-year deterioration; this marked the sixth time in the first eight months of fiscal year 2019/20 that they had been weaker. Specifically, the budget deficit (measured in terms of PSNBex) rose to £5.6 billion in November from £5.3 billion a year earlier. Good news saw the October deficit revised down.
  • PSNBex amounted to £50.9 billion over the first eight months of fiscal year 2019/20 up 11.2% from £45.7 billion during April-November 2018.
  • On the basis of April-November, PSNBex is headed for £42.4 billion in 2019/20 – this which be clearly below the recently restated OBR forecast of £47.6 billion. Much could yet depend on whether the economy can see any pick-up in activity over the final months of the fiscal year with the dilution of domestic political and near-term Brexit uncertainties after the General Election. It must also be taken into account that the public finance data can be prone to significant revisions.
  • In the Spring Statement, the budget deficit (PSNBex) had been forecast by the OBR to rise to £29.3 billion in 2019/20. However, this was restated to £47.6 billion in December to take account of the Office for National Statistics subsequently changing the way it treats student loans in the public finances as well as making some other adjustments. 
  • Central government receipts rose a modest 1.6% year-on-year in November, consistent with the general evidence that the economy is suffering a difficult fourth quarter. The main evidence of the economy’s softness was in corporation tax receipts falling 6.2% year-on-year in November. There was a marginal rise of 0.2% in income and capital gains tax receipts; these have generally been strong this fiscal year helped by recent record high employment and earnings growth reaching an 11-year high in the three months to July. However, employment has essentially flat-lined since June while earnings growth has slowed. VAT receipts were up 0.1% year-on-year.
  • Central government expenditure rose just 0.8% year-on-year in November, bringing the overall growth rate down to 2.5% over the first eight months of the fiscal year. 
  • The budget deficit in 2020/21 is set to be lifted appreciably by the £13.8 billion increase in public spending (4.1% in real terms, the fastest increase in 15 years) announced by Chancellor Sajid Javid in the Spending Review in September.
  • Furthermore, the Budget for 2019/20 which looks likely to be held in February or March looks certain to further loosen the fiscal strings given the promises made by the Conservatives in their campaigning. In particular, the Government has pledged to spend big on infrastructure to take advantage of record low borrowing costs, and it is reportedly going to substantially boost public investment in the Midlands and North of England where it gained many seats from Labour in the General Election.
  • The Conservatives have already announced new fiscal guidelines that they will follow which will allow borrowing for infrastructure investment. Specifically, the government will be allowed to borrow up to 3% of GDP to invest. The Government will aim for a balanced current budget within three years. It will also commit to reconsider its borrowing plans, if debt servicing costs rise too much.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The public finances measured in terms of Public Sector Net Borrowing excluding Banks (PSNBex) saw modest year-on-year deterioration in November as the shortfall amounted to £5.6 billion compared to £5.3 billion in November 2018.

“This was the sixth time in the first eight months of fiscal year 2019/20 (April-November) that the public finances had been weaker year-on-year.

“Some good news saw October’s PSNBex revised down to £9.0 billion from the previously reported £11.2 billion; this was also up modestly from a year earlier (when it was £8.6 billion).

“Over the first eight months of fiscal year 2019/20 (April-November) borrowing totalled £40.9 billion, up £5.1 billion, or 11.2%, on the shortfall of £45.7 billion over April-November 2018.

“In the Spring Statement, the budget deficit (PSNBex) had been forecast by the OBR to rise to £29.3 billion in 2019/20. This forecast was blown out of the water by the Office for National Statistics in the August data changing the way it treats student loans in the public finances as well as making some other adjustments. Indeed, the changed treatment of student loans alone added some £12.4 billion to the budget deficit. Consequently, the OBR issued restated budget forecasts in mid-December (purely on the adjustments made) which lifted the expected PSNBex 2019/20 to £47.6 billion.

“On the basis of April-October, PSNBex is headed for £45.6 billion in 2019/20. However, it may well come in less than this as much of the overshoot has been due to higher public spending which may be influenced by timing effects. Much could also depend on whether the economy can see any pick-up in activity over the final months of the fiscal year if there is some easing of domestic political and Brexit uncertainties. It must also be taken into account that the public finance data can be prone to significant revisions.

“Central government receipts rose a modest 1.6% year-on-year in November, tying in with evidence that the economy is currently soft. The main evidence of the economy’s softness was in corporation tax receipts falling 6.2% year-on-year in November. There was a small increase of 0.2% in income and capital gains tax receipts; these have generally been strong this fiscal year helped by recent record high employment and earnings growth reaching an 11-year high in the three months to July. However, employment has flat-lined since midyear while annual average earnings growth eased back from an 11-year high of 3.9% in the three months to July to 3.2% in the three months to October. VAT receipts were up 0.1% year-on-year.

“Meanwhile, there was an increase of just 0.8% year-on-year increase in central government expenditure in November. This was limited by a 28.7% year-on-year drop in debt interest payments to £2.1 billion.

“Over the first eight months of fiscal year 2019/20, central government receipts were up 2.1% year-on-year. Income and capital gains tax receipts were up 2.5% year-on-year while VAT receipts were up 3.3%. However, corporation tax receipts were down 2.7% year-on-year, which was the weakest performance since 2013 and a sign of the economy’s softness.

“Government expenditure was up 2.5% year-on-year over the first eight months of fiscal 2019/20.”