Press release

22 Jan 2020 London, GB

UK public finances remain on course to undershoot restated 2019/20 fiscal target

The December public finances figures showed modest year-on-year improvement as the budget deficit (measured in terms of PSNBex) dipped to £4.8 billion in December from £5.0 billion a year earlier.

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  • The December public finances figures showed modest year-on-year improvement as the budget deficit (measured in terms of PSNBex) dipped to £4.8 billion in December from £5.0 billion a year earlier. Further helpful news saw the November deficit revised down to £4.9 billion from the previously reported £5.6 billion.
  • PSNBex amounted to £54.6 billion over the first nine months of fiscal year 2019/20 up 7.9% from £50.6 billion during April-December 2018.
  • On the basis of April-December, PSNBex is headed for £41.0 billion in 2019/20 – this would be £6.6 billion below the restated OBR forecast of £47.6 billion.
  • There needs to be a surplus on the public finances of £7.0 billion over January-March to at least meet the PSNBex target of £47.6 for 2019/20. This should be very doable given that there was a surplus of £12.7 billion over January-March 2019.
  • A significant factor could be whether or not the economy sees some pick-up in activity over the first quarter of 2020 amid reduced uncertainties following the decisive General Election result. It must also be taken into account that the public finance data can be prone to significant revisions.
  • Central government receipts rose 3.7% year-on-year in December, which suggests that the economy might have seen some modest improvement in activity. However, looking at the breakdown, there are signs that the economy was still subdued. VAT receipts were only up 1.7% year-on-year in December which ties in with soft retail sales (volumes fell 0.6% month-on-month and were up just 0.9% year-on-year). Meanwhile, corporation tax receipts fell again year-on-year (by 6.7%). On the positive side, there was a marked pick-up in national insurance contributions in-line with a decent labour market.
  • Central government expenditure rose 4.3% year-on-year in December. 
  • The budget deficit in 2020/21 is set to be lifted 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 (to be held on 11 March) looks likely to further loosen the fiscal strings, with spending expected on infrastructure. The Government has already announced new fiscal guidelines 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 improvement in December as the shortfall amounted to £4.8 billion compared to £5.0 billion in December 2018.

“Some good news saw November’s PSNBex revised down to £4.9 billion from the previously reported £5.6 billion; this was below a shortfall of £5.3 billion in November 2018.

“Over the first nine months of fiscal year 2019/20 (April-December) borrowing totalled £54.6 billion, up £4.0 billion, or 7.9%, on the shortfall of £50.6 billion over April-December 2018.

“The Office for Budget Responsibility (OBR) issued a restated forecast of £47.6 billion for PSNBex in mid-December (based purely on the changed way from August that the Office for National Statistics treats student loans in the public finances – which added some £12.4 billion to the budget deficit – as well as some other ONS tweaks). This was up from the £29.3 billion budget deficit for 2019/20 that the OBR had expected in the March 2019 Spring Statement.

“On the basis of April-December 2019, PSNBex is headed for £41.0 billion in 2019/20 – this would be £6.6 billion below the restated OBR forecast of £47.6 billion.

“Or to put it another way, there needs to be a surplus on the public finances of £7.0 billion over January-March to at least meet the PSNBex target of £47.6 for 2019/20. This should be very doable given that there was a surplus of £12.7 billion over January-March 2019 (there is always a substantially surplus in January as it is a key month for income tax receipts; the January surplus was £12.0 billion in 2019).

“A significant factor could yet be whether or not the economy sees some pick-up in activity over the first quarter of 2020 amid reduced uncertainties following the decisive General Election result. It must also be taken into account that the public finance data can be prone to significant revisions.

“Central government receipts rose 3.7% year-on-year in December, which on the face of it suggests that the economy might have seen some modest improvement in activity, particularly after the decisive General Election result, following GDP contraction of 0.3% month-on-month in November. However, looking at the breakdown, there are signs that the economy was still subdued. VAT receipts were only up 1.7% year-on-year in December which ties in with soft retail sales (volumes fell 0.6% month-on-month and were up just 0.9% year-on-year). Meanwhile, corporation tax receipts fell again year-on-year (by 6.7%). On the positive side, there was a marked pick-up in national insurance contributions in line with a decent labour market.

“Meanwhile, there was an increase of 4.3% year-on-year increase in central government expenditure in December. This was lifted by increased year-on-year expenditure of £1.2 billion on goods and services, as well as an £0.8 billion rise in staff costs. However, there was a £1.1 billion (28.7%) year-on-year drop in debt interest payments.

“Over the first nine months of fiscal year 2019/20, central government receipts were up 2.3% year-on-year. Income and capital gains tax receipts were up 1.9% year-on-year while VAT receipts were up 2.9%. However, corporation tax receipts were down 3.4% 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 nine months of fiscal 2019/20.”