- Public finances recorded a smaller-than-expected, reduced deficit in October although it was still substantial and up markedly year-on-year (measured by Public Sector net Borrowing excluding banks – PSNBex)
- The budget deficit in October was helped by the economy’s ongoing recovery from April’s lows and from reduced government spending on the furlough scheme
- PSNBex came in at £22.3bn in October – the largest October shortfall on record and nearly double the £11.5bn shortfall in October 2019. It was down from £28.6bn in September, a figure revised down appreciably from the previous estimate of £36.1bn
- The revision for September (following similar revisions to the April-August shortfalls) highlights that public finances are currently subject to significant updates amid the unprecedented circumstances
- Central government receipts fell 2.8% year-on-year in October, while central government expenditure increased 9.9% year-on-year
- The first seven months of fiscal year 2020/21 (April-October) have seen the largest seven deficits since records began in 1993. On top of the cost of COVID-19 measures, the overall state of the economy has also limited receipts
- PSNBex amounted to a record £214.9bn over the first seven months of the 2020/21 fiscal year, up from £45.8bn in April-October 2019. This fiscal year’s PSNBex to-date is already £160.1bn up on the £54.8bn that the Office for Budget Responsibility (OBR) had forecast in March for the whole year. It is also already £57.2bn more than the peak £157.7bn deficit seen in 2009/10 during the financial crisis
- The April-October public finances herald what is going to be a record year for the budget deficit and provide a challenging backdrop for the Chancellor as he prepares to present the Spending Review on Wednesday
- Public finances are set to come under increased upward pressure from the cost of recent extra measures to support the economy and jobs, most notably the extension of the furlough scheme. The likely renewed economic contraction in the fourth quarter, caused by the national lockdown in England, will reduce receipts and further put up the deficit
- The EY ITEM Club currently expects the budget deficit (measured in terms of PSNBex) to come in around £400bn in 2020/21, but there is a possibility it could now come in less than this given the October data and downward revisions to the back data
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 seventh successive, large shortfall in October 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 came in at £22.3bn in October – the largest October shortfall on record and the sixth biggest monthly deficit ever. It was nearly double the £11.5bn PSNBex in October 2019. It was also down from £28.6bn in September, which has been revised down from the previous estimate of £36.1bn.
“Nevertheless, October’s shortfall was less-than-expected; the consensus forecast had been for a deficit around £36bn. It was also well down from the record, peak levels seen in May (£43.7 billion) and April (£47.3 billion). This is a consequence of more people coming off the furlough scheme and returning to work, and the economy growing again, although growth may well have slowed further in October after losing momentum in August and September.
“The appreciable downward revision to September’s deficit, following similar downward revisions to the shortfalls originally reported for April-August, highlights that public finances are currently subject to significant updates amid the unprecedented circumstances.
“PSNBex amounted to a record £214.9bn over the first seven months of fiscal year 2020/21, up from £45.8bn in April-October 2019. To put this into perspective, it is already up £160.1bn on the £54.8bn that the Office for Budget Responsibility (OBR) had forecast in March for the whole fiscal year. It is also already £57.2bn more than the peak £157.7bn deficit seen in 2009/10 during the financial crisis.
“Central government receipts fell 2.8% year-on-year in October. VAT receipts were down 11.7% year-on-year, while corporation tax receipts fell 9.7% year-on-year. VAT receipts are currently being limited by the temporary VAT cut (from 20% to 5%) for the hospitality sector. Additionally, Stamp Duty receipts, down 26.6% year-on-year in October, have been reduced by the temporary raising of the threshold since July. However, income and capital gains tax receipts rose 6.5% year-on-year in October, as earnings have picked up modestly recently due to people coming off the furlough scheme.
“Over the first seven months of fiscal year 2020/21 (April-October), central government receipts were down 8.8% year-on-year. VAT receipts were down 12.0% (companies were allowed to defer VAT payments between 20 March and 30 June), corporation tax receipts were down 15.8% and income and capital gains tax receipts were down 4.0% year-on-year.
“Meanwhile, central government expenditure increased 9.9% year-on-year in October as it was pushed up by government measures to support the economy, businesses and jobs in the face of the pandemic. There was a reduced £1.3bn spent on the current job support schemes: the Coronavirus Job Retention Scheme (CJRS) and the Self Employment Income Support Scheme (SEISS).
“Over the first seven months of fiscal year 2020/21, central government expenditure was up 28.5% year-on-year.”