Press release

22 Dec 2020 London, GB

UK public finances see larger deficit in November as annual £400bn shortfall becomes more likely – EY ITEM Club comments

UK public finances see larger deficit in November as annual £400bn shortfall becomes more likely – EY ITEM Club comments

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  • The budget deficit (Public Sector net Borrowing excluding banks – PSNBex) rose to £31.6bn in November, the third largest monthly budget deficit on record and the highest since May. This was up from £21.7bn in October and more than five times the November 2019 shortfall of £5.6bn
  • The growing shortfall was due to lower tax receipts and increased government spending on measures to support the economy and jobs. Central government receipts fell 6.1% year-on-year in November, while central government expenditure increased 41.7% year-on-year
  • The first eight months of fiscal year 2020/21 (April-November) have seen the eight largest monthly deficits since records began in 1993, amounting to a record £240.9bn, up from £52.3bn in April-November 2019. This is £186.1bn more than the £54.8bn originally forecast for 2020/21 by the Office for Budget Responsibility in the March Budget and is already £83.2bn more than the peak £157.7bn deficit seen in 2009/10 during the financial crisis
  • If the trend of the first eight months of fiscal year 2020/21 continued, the budget deficit (PSNBex) would come in around £264bn. However, it looks likely to come in significantly higher than this with the furlough scheme now being extended until April and other supportive fiscal measures announced for the economy in the recent Spending Review
  • The EY ITEM Club expects the budget deficit (PSNBex) to come in around £380bn. However, there is an increasing possibility that it could reach £400bn due to the furlough scheme extension and other supportive fiscal measures, and if additional support is introduced over the coming weeks for businesses affected by Tier 4 restrictions

Howard Archer, chief economic advisor to the EY ITEM Club, says: 

“The public finances saw an eighth successive large shortfall in November as the Government’s measures to support businesses and jobs affected by COVID-19 resulted in reduced receipts and substantially increased public spending. Significantly, with the extension of the furlough scheme, the proportion of workers on furlough rose to 15.5% during the second half of November, the highest since August.

“The November lockdown in England likely resulted in a contraction in activity, further limiting tax receipts.

“PSNBex rose to £31.6bn in November – this was the third largest ever monthly shortfall (after April and May) and was up from £21.7bn in October (revised from the previously reported £22.3bn). It was the largest November shortfall on record and more than five times the £5.6bn PSNBex in November 2019. 

“Central government receipts fell 6.1% year-on-year in November. VAT receipts were down 12.9% year-on-year (retail sales volumes fell 3.8% month-on-month as non-essential retailers were closed by the lockdown) while corporation tax receipts fell 10.7% year-on-year. VAT receipts are currently further limited by the temporary VAT cut (from 20% to 5%) for the hospitality sector. Additionally, Stamp Duty receipts, which were down 11.2% year-on-year in November, have been reduced by the temporary raising of the threshold since July. However, income and capital gains tax receipts rose 8.6% year-on-year in November, as earnings have increased recently.

“Meanwhile, central government expenditure increased 41.7% year-on-year in November following government measures to support the economy, businesses and jobs in the face of the pandemic. There was increased spending on the current job furlough schemes. 

“The budget deficit amounted to £240.9bn over the first eight months of fiscal year 2020/21, up from £52.3bn in April-November 2019. To put this into perspective, it is already up £186.1bn on the total PSNBex of £54.8bn forecast for 2020/21 by the Office for Budget Responsibility in the March Budget. It is also already £83.2bn more than the peak £157.7bn deficit in 2009/10 during the financial crisis. In November’s Spending Review, the OBR forecast the budget deficit would be £393.5bn over 2020/21.

“Between April and November, central government expenditure was up 30.0% year-on-year and receipts were down 7.6% year-on-year. VAT receipts were down 11.0%, with companies allowed to defer VAT payments between 20 March and 30 June. Corporation tax receipts were down 14.5% and income and capital gains tax receipts were down 2.4% year-on-year. 

“If the trend of the first eight months of fiscal year 2020/21 continued, the budget deficit (PSNBex) would come in around £264bn. However, it looks likely to come in significantly higher than this with the furlough scheme now being extended until April and other supportive fiscal measures announced for the economy in the recent Spending Review. Indeed, if introduced, more support for businesses affected by Tier 4 restrictions could potentially send the budget deficit above £400bn.”