Press release

25 Sep 2020 London, GB

UK public finances record larger deficit in August, headed for shortfall of around £360bn in 2020/21 – EY ITEM Club comments

The public sector deficit (Public Sector net Borrowing excluding banks – PSNBex) widened again in August to be the third largest shortfall of all time and the biggest August deficit ever.

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Related topics Growth COVID-19
  • The public sector deficit (Public Sector net Borrowing excluding banks – PSNBex) widened again in August to be the third largest shortfall of all time and the biggest August deficit ever. It was lifted by reduced receipts and the costs of the Government’s schemes to support the economy which were added to in August by the Eat Out to Help Out scheme, the temporary VAT cut for the hospitality sector and the raising of the Stamp Duty threshold
  • However, the budget deficit in August was still notably below the record levels seen in March and April. This is a consequence of the economy progressively coming away from its April lows and more people coming off the furlough scheme and returning to work
  • PSNBex widened to £35.9bn in August after narrowing to £15.4bn in July (revised down markedly from the previous estimate of £26.7bn) from £28.9bn in June, £44.3bn in May and a record £49.1bn in March. It was a substantially different performance to a shortfall of £5.4bn in August 2019
  • An appreciable downward revision to July’s deficit (following similar downward revisions to the shortfalls in April-June) highlights that public finances are going to be subject to ongoing – possibly major – revisions over the coming months given the unprecedented circumstances
  • Central government receipts fell 14.3% year-on-year in August, while central government expenditure increased 34.7% year-on-year
  • The first five months of fiscal year 2020/21 (April-August) have seen the largest five deficits since records began in 1993
  • Consequently, the budget deficit (PSNBex) amounted to a record £173.7bn over the first five months of fiscal year 2020/21, up from £26.8bn in April-August 2019. It is already up £118.9bn on the total PSNBex of £54.8bn for 2020/21 that the Office for Budget Responsibility (OBR) had forecast in the March Budget
  • The state of the public finances over April-August heralds what is going to be a record year for the budget deficit. The deficit will increase further due to the latest support measures announced on Thursday by the Chancellor in the Winter Economic Plan, which possibly could cost around £10bn
  • The EY ITEM Club now expects the budget deficit (measured in terms of PSNBex) to come in around £360bn in 2020/21 (17.6% 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 fifth successive large shortfall in August – the fifth month of fiscal year 2020/21 – as the Government’s measures to support businesses and jobs affected by COVID-19 fed through both in terms of reduced receipts and substantially increased public spending.

“PSNBex in August saw a renewed widening in the deficit to the third highest ever after it had narrowed to a three-month low in July. PSNBex was lifted in August by the costs of the ‘Eat Out to Help Out’ scheme, the temporary VAT cut for the hospitality sector and the raising of the Stamp Duty threshold. Also contributing to the widening of PSNBex is that August seasonally sees lower tax receipts.

“However, the budget deficit in August was still notably below the record levels seen in March and April. This is a consequence of the economy progressively coming away from its April lows and more people coming off the furlough scheme and returning to work.

“The PSNBex widened to £35.9bn in August after narrowing to £15.4bn in July (revised down markedly from the previous estimate of £26.7bn) from £28.9bn in June, £44.3bn in May and a record £49.1bn in March. It was a substantially different performance to the shortfall of £5.4bn in August 2019.

“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 July’s deficit, following similar downward revisions to the shortfalls in April-June, 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 £173.7bn over the first five months of fiscal year 2020/21, up from 26.8bn in April-August 2019. To put this into perspective, it is already up £118.9bn on the total PSNBex of £54.8bn for 2020/21 that the Office for Budget Responsibility (OBR) had forecast in the March Budget.

“Central government receipts fell 14.3% year-on-year in August. VAT receipts were down 28.5% year-on-year, corporation tax receipts fell 29.7% year-on-year and income and capital gains tax receipts were down 4.5% year-on-year.

“Over the first five months of fiscal year 2020/21 (April-August), central government receipts were down 12.0% year-on-year. VAT receipts were down 20.9% (companies were allowed to defer VAT payments between 20 March and 30 June), corporation tax receipts were down 24.5% and income and capital gains tax receipts were down 8.8% year-on-year.

“Meanwhile, central government expenditure increased 34.7% year-on-year in August as it was pushed up by government measures to support the economy, businesses and jobs in the face of the pandemic. There was £10.8bn spent on the current job furlough schemes: the Coronavirus Job Retention Scheme (CJRS) and the Self Employment Income Support Scheme (SEISS).

“Over the first five months of fiscal year 2020/21, central government expenditure was up 34.2% year-on-year.”

Outlook for public finances

Howard Archer continues: “The state of public finances over April to August 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 continues to recover 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 that was tapered from August and will end in October), but this will be countered by the additional support measures announced by the Chancellor in his Summer Statement, which are likely to cost around £30bn. 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.”

“Furthermore, the Chancellor’s latest measures in his Winter Economic Plan could add another £10bn.

Howard Archer adds: “The EY ITEM Club expects the budget deficit (measured in terms of PSNBex) to come in at £360 billion in 2020/21 (17.6% of GDP).”