Press release

22 Jan 2021 London, GB

UK public finances see larger deficit in December as 2020/21 shortfall could come in around £420bn – EY ITEM Club comments

The budget deficit (Public Sector net Borrowing excluding banks – PSNBex) rose to £34.1bn in December, the third largest monthly budget deficit on record and the highest since May. This was up from £26.1bn in November and nearly six times the December 2019 shortfall of £5.9 bn.

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Related topics Growth COVID-19
  • The budget deficit (Public Sector net Borrowing excluding banks – PSNBex) rose to £34.1bn in December, the third largest monthly budget deficit on record and the highest since May. This was up from £26.1bn in November and nearly six times the December 2019 shortfall of £5.9 bn
  • 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 1.2% year-on-year in December, while central government expenditure grew 44.2% year-on-year
  • The first nine months of fiscal year 2020/21 (April-December) have seen the nine largest monthly deficits since records began in 1993, amounting to a record £270.8 bn, up from £58.1 bn in April-December 2019. This is £216bn more than the £54.8bn originally forecast for 2020/21 by the Office for Budget Responsibility in the March 2020 Budget and is already £113.1bn more than the peak £157.7bn deficit in seen in 2009/10 during the financial crisis
  • If the trend of the first nine months of fiscal year 2020/21 continued, the budget deficit (PSNBex) would come in around £266bn. However, it looks likely to come in significantly higher than this with the furlough scheme now being extended until April and a series of other supportive fiscal measures announced for the economy. Additionally, the economy looks to be headed for clear contraction in Q1 2021 which will affect receipts
  • The EY ITEM Club expects the budget deficit (PSNBex) for 2020/21 to come in around £420bn (19.9% of GDP)
  • While the Chancellor is expected to prioritise supporting the economy in the March Budget, the size of the budget deficit is adding to speculation that the Chancellor could take some initial steps to start restoring the public finances to a more sustainable state. 

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

“The public finances saw a ninth successive large shortfall in December 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 continuation of the furlough scheme, the ONS reported December saw £4.7bn spent on the Coronavirus Job Retention Scheme (CJRS) and £5.3bn on the Self Employment Income Support Scheme.

“PSNBex rose to £34.1bn in December – this was the third largest ever monthly shortfall (after April and May 2020) and was up from £26.1bn in November (previously reported at £31.6bn) and £21.7bn in October. It was the largest December shortfall on record and nearly six times the £5.9bn PSNBex in December 2019. 

“Central government receipts fell 1.2% year-on-year in December, while VAT receipts were down 7.1% year-on-year. VAT receipts are currently being limited by the temporary VAT cut (from 20% to 5%) for the hospitality and leisure sectors. Additionally, Stamp Duty receipts, which were down 6.9% year-on-year in December, have been reduced by the temporary raising of the threshold since July. However, income and capital gains tax receipts rose 6.2% year-on-year in December, as earnings have increased recently. Corporation tax receipts rose 17.9% year-on-year.

“Meanwhile, central government expenditure increased 44.2% year-on-year in December following government measures to support the economy, businesses and jobs in the face of the pandemic.

“The budget deficit amounted to £270.8bn over the first nine months of fiscal year 2020/21, up from £58.1bn in April-December 2019. To put this into perspective, it is already up £216bn on the total PSNBex of £54.8bn forecast for 2020/21 by the Office for Budget Responsibility in the March 2020 Budget. It is also already £113.1bn 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 December, central government expenditure was up 30.7% year-on-year and receipts were down 7.0% year-on-year. VAT receipts were down 12.6%, with companies allowed to defer VAT payments between 20 March and 30 June. Corporation tax receipts were down 6.3% and income and capital gains tax receipts were down 1.6% year-on-year. 

“If the trend of the first nine months of fiscal year 2020/21 continued, the budget deficit (PSNBex) would come in around £266bn. 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. Additionally, the economy looks set to contract clearly in the first quarter of 2021 which will affect receipts.

“The EY ITEM Club expects the budget deficit (PSNBex) to come in around £420bn in 2020/21 – 19.9% of GDP.”