- PSNBex increased to £35.5 billion in June, up from £7.2 billion a year earlier, as a result of the Government’s measures to support businesses and jobs amid the COVID-19 pandemic. The likely record quarter-on-quarter GDP contraction in the second quarter will also have weighed on receipts. However, this was less than the £41.5 billion shortfall that had been expected
- Public finances will be subject to major revisions over the coming months given the unprecedented circumstances. May’s shortfall was revised down appreciably to £45.5 billion from the previously reported £55.2 billion. This followed a similar, earlier downward revision to April’s shortfall
- Nevertheless, the EY ITEM Club expects the budget deficit (measured in terms of PSNBex) to get up to at least £335 billion in 2020/21 (17.0% of GDP) and it could very well exceed this level by some margin
- The first three months of fiscal year 2020/21 (April-June) have seen the largest three deficits since records began in 1993
- The state of the public finances over April-June heralds what is going to be a record year for the budget deficit
- The impact of coronavirus on June’s public finances came from both increased government spending and markedly reduced receipts which reflected contracting economic activity and the delaying of tax payments for businesses and on VAT
Howard Archer, chief economic advisor to the EY ITEM Club, says:
"The public finances measured in terms of Public Sector Net Borrowing excluding banks (PSNBex) saw a third successive large shortfall in June – the third month of fiscal year 2020/21 – as the Government’s measures to support businesses and jobs in the face of the coronavirus’ impact on the economy fed through both in terms of reduced receipts and substantially increased public spending. A likely record quarter-on-quarter GDP contraction in the second quarter will also have weighed on receipts.
"Specifically, PSNBex jumped to £35.5 billion in June from £7.2 billion a year earlier.
"This followed a shortfall of £45.5 billion in May; this was revised down from the previously reported deficit of £55.2 billion, but was still up significantly from £5.7 billion in May 2019. The ONS reported that May’s downward revision was largely because of stronger than previously estimated tax receipts and National Insurance contributions.
"The downward revision to May’s deficit (following an earlier, similar downward revision to April’s shortfall) highlights that the public finances are going to be subject to major revisions over the coming months as they face unprecedented times. April’s shortfall was revised down further to a still significant £46.9 billion from £48.5 billion (it had originally been reported at £62.1 billion). This was up from £11.1 billion a year earlier.
"The budget deficit (PSNBex) amounted to £127.9 billion over the first three months of fiscal year 2020/21, up from £24.0 billion in April-June 2019. To put this into perspective, it is already up £73.1 billion on the total PSNBex of £54.8 billion that the Office for Budget Responsibility (OBR) had forecast in the March Budget.
"Central government receipts fell 16.5% year-on-year in June, as they were affected by a combination of contracting economic activity, markedly rising unemployment and weaker earnings, VAT payment deferrals for retailers, and companies being allowed to delay tax payments.
"Central government expenditure increased to 24.8% year-on-year in June as it was pushed up by the Government’s COVID-19 measures. This included £14.0 billion in Coronavirus Job Retention Scheme Repayments.
"VAT receipts were down 45.1% year-on-year, corporation tax receipts fell 19.2% year-on-year and income and capital gains tax receipts were down 1.6% year-on-year in June, as redundancies were made and pay affected.
"Over the first three months of fiscal year 2020/21 (April-June), central government receipts were down 13.2% year-on-year. VAT receipts were down 28.1%, corporation tax receipts were down 17.4% and income and capital gains tax receipts were down 4.6% year-on-year.
"Over the first three months of fiscal year 2020/21 (April-June), central government expenditure was up 42.5% year-on-year.”
Outlook for Public Finances
Howard Archer continues: "The state of the public finances over April-June heralds what is clearly going to be a record year for the budget deficit. This is even allowing for the fact that the rate of decline in the public finances should slow as the economy hopefully recovers after a record contraction in the second quarter.
"Some of the Government’s support measures for the economy will also be wound down over the coming months (for example, the jobs furlough scheme will be tapered from August and will end in October), but this will be countered by the additional support measures announced by the Chancellor in his recent Summer Statement, which are likely to cost around £30 billion. These measures were primarily aimed at supporting jobs and also included temporarily raising the Stamp Duty threshold on house purchases to £500,000 and cutting VAT from 20% to 5% for the hospitality sector."
Howard Archer adds: "The EY ITEM Club expects the budget deficit (measured in terms of PSNBex) to get up to at least £335 billion in 2020/21 (17.0% of GDP) at least in 2020/21 and it could very well exceed this level."