Press release

21 Aug 2020 London, GB

UK public finances record smaller but still large deficit in July – EY ITEM Club comments

While there was another substantial public sector deficit recorded in July, the rate of decline has slowed recently, which has been helped by the economy progressively coming off its April lows.

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  • While there was another substantial public sector deficit recorded in July, the rate of decline has slowed recently, which has been helped by the economy progressively coming off its April lows. The lower deficit in July reinforces belief that the UK economy is likely to have seen further improvement over the month
  • More people coming off the furlough scheme and returning to work in July also likely contributed to the lower deficit
  • However, the monthly budget deficit (PSNBex) was still the fourth largest on record at £26.7 billion in July, and compared to a surplus of £1.6 billion a year earlier. The stimulus measures announced by the Chancellor in his Summer Statement will add to the pressure on the public finances
  • An appreciable downward revision to June’s deficit (following an earlier similar downward revision to the shortfalls in May and April) highlights that public finances are going to be subject to ongoing – possibly major – revisions over the coming months given the unprecedented circumstances
  • The major hit to July’s public finances came from both sharply increased government spending and markedly reduced receipts, which reflected contracting economic activity and the delaying of tax payments for businesses and on VAT
  • Central government receipts fell 16.7% year-on-year in July, as they were impacted by a combination of reduced employment and weakened earnings, deferred VAT payments for retailers and companies being allowed to delay tax payments
  • Central government expenditure reached 22.5% year-on-year in July as it was pushed up by government measures to support the economy, businesses and jobs, not least £7.1 billion was spent on the current job furlough schemes
  • The first four months of fiscal year 2020/21 (April-July) have seen the largest four deficits since records began in 1993 as the Government’s measures to support businesses and jobs from the coronavirus’ effect on the economy impacted both in terms of reduced receipts and increased public spending. Record GDP contraction of 20.4% quarter-on-quarter has also impacted public finances, which has affected receipts
  • Consequently, the budget deficit (PSNBex) amounted to a record £150.5 billion over the first four months of fiscal year 2020/21, up from £22.0 billion in April-July 2019. To put this into perspective, it is already up £95.7 billion on the total PSNBex of £54.8 billion that the Office for Budget Responsibility (OBR) had forecast in the March Budget
  • The state of the public finances over April-July heralds what is going to be a record year for the budget deficit
  • The EY ITEM Club expects the budget deficit (measured in terms of PSNBex) to come in around £335 billion in 2020/21 (17.0% of GDP)

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 fourth successive large shortfall in July – the fourth month of fiscal year 2020/21 – as the government’s measures to support businesses and jobs impacted by coronavirus fed through both in terms of reduced receipts and substantially increased public spending.

“However, PSNBex in July was at least at its lowest level since March. July’s reduced deficit was clearly helped by the economy progressively coming off its April lows. Indeed, the lower deficit in July reinforces belief that the economy likely saw further marked improvement over the month. Additionally, more people coming off the furlough scheme and returning to work in July also likely contributed to the lower deficit.

“The PSNBex came in at £26.7 billion in July, which was down from £29.5 billion in June (revised from the previous estimate of £35.5 billion), £45.6 billion in May and a record £48.7 billion in March. It was a substantially weakened performance compared to a surplus of £1.6 billion in July 2019 (there is frequently a surplus on the public finances in July as it is normally a strong month for tax receipts).

“The ONS reported that June’s downward revision was largely due to stronger than previously estimated tax receipts and National Insurance contributions.

“The downward revision to June’s deficit (following an earlier similar marked downward revision to the shortfalls in May and April) highlights that the public finances are going to be subject to major revisions over the coming months given the unprecedented circumstances.

“The budget deficit (PSNBex) amounted to £150.5 billion over the first four months of fiscal year 2020/21, up from £22.0 billion in April-July 2019. To put this into perspective, it is already up £95.7 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 16.7% year-on-year in July, as they were affected by markedly reduced employment and weaker earnings, VAT payment deferrals for retailers and companies being allowed to delay tax payments.

“VAT receipts were down 26.2% year-on-year, corporation tax receipts fell 29.2% year-on-year and income and capital gains tax receipts were down 25.6% year-on-year in June, as redundancies were made and pay affected. The ONS reported that self-assessed Income tax receipts were £4.8 billion in July 2020, £4.5 billion less than in July 2019, because of the Government’s deferral policy.

“Over the first four months of fiscal year 2020/21 (April-July), central government receipts were down 11.8% year-on-year. VAT receipts were down 20.4%, corporation tax receipts were down 24.7% and income and capital gains tax receipts were down 10.6% year-on-year.

“Meanwhile, central government expenditure jumped 22.5% year-on-year in July as it was pushed up by government measures to support the economy, businesses and jobs in the face of the pandemic. There was £7.1 billion spent on the current job furlough schemes: Coronavirus Job Retention Scheme (CJRS) and Self Employment Income Support Scheme (SEISS).

“Over the first four months of fiscal year 2020/21 (April-July), central government expenditure was up 37.7% year-on-year.”

Outlook for public finances

Howard Archer continues: “The state of public finances over April to July 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 further as the economy recovers following record contraction of 20.4% quarter-on-quarter 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 is being 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 come in at £335 billion in 2020/21 (17.0% of GDP).”