- The public finances showed a smaller year-on-year (y/y) decline in January than had been expected and there were significant downward revisions to past shortfalls
- However, the data will not have made the Chancellor’s job easier as he prepares his 3 March Budget. The January public budget deficit (Public Sector net Borrowing excluding banks – PSNBex) amounted to £8.8bn in January. This contrasted with a surplus of £9.6bn in January 2020
- January’s shortfall was due to lower tax receipts and increased government spending on measures to support the economy and jobs. Central government receipts fell 1.0% year-on-year (y/y) in January, while central government expenditure rose 31.7%
- The first 10 months of fiscal year 2020/21 (April 2020 – January 2021) saw a cumulative deficit on the public finances of £270.6bn, up from £48.6bn in April 2019 – January 2020. This is £215.8bn more than the £54.8bn originally forecast for 2020/21 by the Office for Budget Responsibility (OBR) in the March 2020 Budget and is already £112.9bn more than the peak £157.7bn deficit seen in 2009/10 during the financial crisis
- If the trend of the first 10 months of fiscal year 2020/21 continues, the budget deficit (PSNBex) would come in around £318bn. However, it looks likely to be higher than this with the furlough scheme now being extended until April and a series of other supportive fiscal measures being announced recently
- The economy looks headed for contraction in Q1 2021, which will also affect receipts. Upward revisions to earlier data are also likely
- The EY ITEM Club had been expecting the budget deficit to come in around £420bn (19.9% of GDP). However, the downward revisions to earlier shortfalls this year and January’s smaller-than-expected deficit means it is now possible that PSNBex could come in just below £400bn
- While the Chancellor is expected to prioritise supporting the economy in the Budget, the large size of the budget deficit means there may be some pressure to take some limited 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 (measured in terms of Public Sector Net Borrowing excluding banks – PSNBex) saw a rare shortfall in January, amounting to £8.8bn. Positively though, this was significantly below the consensus forecast of a deficit of £25.0bn.
“The public finances normally see a surplus in January as it is a key month for tax receipts. Indeed, this was the first January shortfall for 10 years and the largest since records began in 1993. There had been a surplus of £9.6bn in January 2020.
“PSNBex had previously risen to £26.8bn in December, revised down from the previously reported at £34.1bn. This was the fifth largest ever monthly shortfall, and followed deficits of £24.3bn in November and £18.5bn in October. Both the November and October shortfalls were also revised down. December 2020’s deficit was the largest December shortfall on record and more than four times the £5.9bn PSNBex in December 2019.
“The Government’s measures to support businesses and jobs affected by COVID-19 resulted in reduced receipts and substantially increased public spending. Meanwhile, significant COVID-19-related restrictions on activity during the fiscal year as well as the lockdown in January limited tax receipts.
“Central government receipts fell 1.0% year-on-year in January. VAT receipts were down 8.8% year-on-year. VAT receipts are currently being limited by the temporary VAT cut (from 20% to 5%) for the hospitality and leisure sectors as well as the closure of non-essential retailers. Additionally, Stamp Duty receipts, which were down 24.2% year-on-year in January, have been reduced by the temporary raising of the threshold since July. However, income and capital gains tax receipts rose 4.5% year-on-year in January, as earnings have increased recently. The ONS reported that self-assessed Income Tax receipts were £16.8bn in January 2021, £1.4bn more than in January 2020; Corporation tax receipts rose 2.1% year-on-year.
“Central government expenditure increased 31.7% year-on-year in December 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 support and the ONS reported that, in January, there was £5.1bn expenditure on these schemes.
“The budget deficit amounted to £270.6bn over the first 10 months of fiscal year 2020/21, up from £48.6 bn in April 2019 – January 2020. To put this into perspective, it is already up £215.8bn on the total PSNBex of £54.8bn forecast for 2020/21 by the OBR in the March 2020 Budget. It is also already £112.9bn 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 2020 and January 2021, central government expenditure was up 29.8% year-on-year and receipts were down 6.1% year-on-year. VAT receipts were down 11.6%, with companies allowed to defer VAT payments between 20 March and 30 June. Corporation tax receipts were down 4.3% and income and capital gains tax receipts were up 0.1% year-on-year.
“Should the pattern of the first 10 months of fiscal year 2020/21 continue, the budget deficit (PSNBex) would come in around £318bn. However, it looks likely to come in much higher than this with the furlough scheme now being extended until April and a series of other supportive fiscal measures announced for the economy recently. Additionally, the economy looks set to contract clearly in the first quarter of 2021 which will affect receipts.
“The EY ITEM Club had been expecting the budget deficit to come in around £420bn (19.9% of GDP). However, the downward revisions to earlier shortfalls this year and January’s smaller-than-expected deficit means it is now possible that PSNBex could come in just below £400bn.”