- The year-on-year (y/y) decline in the public finances in February was slightly less than expected, while there were significant downward revisions to past shortfalls
- The February data and revisions suggest that the Chancellor will comfortably meet – and probably undershoot – the revised targets for the public finances contained in the Budget. However, there are likely to be significant further revisions to the data and the Office for National Statistics is yet to incorporate estimates of the likely level of write-offs from various government-backed loan schemes, which the Office for Budget Responsibility (OBR) currently expects to be around £27.2bn
- The February public budget deficit (Public Sector net Borrowing excluding banks – PSNBex) amounted to £19.1bn in February. This was up markedly from a shortfall of just £1.6bn in February 2020 and was the highest February shortfall since monthly records began in 1993
- February’s increased shortfall was due to lower tax receipts and increased government spending on measures to support the economy and jobs. Central government receipts fell 1.4% y/y in February, while central government expenditure rose 25.1% y/y
- In the Budget, the OBR forecast a budget deficit of £354.6bn in 2020/21. To achieve this – and excluding the loan write-off – the Chancellor needs the March shortfall to be no more than £75.6 billion, which looks achievable especially given signs that the economy has picked up from its January lows. The largest monthly deficit in so far in the current fiscal year 2020/21 was £47.2bn in April
- The Budget provided further fiscal support for businesses and jobs in 2021/22. Consequently, the OBR forecasts the budget deficit to still be as high as £233.9bn in the next financial year. This is based on projected GDP growth of 4.0% in 2021, which now looks too low. The EY ITEM Club believes the 2021/22 budget deficit could come in significantly lower, around £215bn.
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 £19.1bn year-on-year (y/y) shortfall in February 2021. This was deeper than the very small shortfall of £1.6bn in February 2020. However, the latest shortfall was modestly less than the consensus forecast of a deficit of £21.0bn.
“Meanwhile, January’s shortfall was revised down to £3.1bn from the previously reported deficit of £8.8bn. Even so, this was the first January shortfall for 10 years and the largest since records began in 1993. There had been a surplus of £9.5bn in January 2019.
“The public finances normally see a surplus in January as it is a key month for tax receipts. The February public finances also tend to benefit from higher tax receipts than most months as some of the tax receipts due in January arrive late.
“The Government’s measures to support businesses and jobs affected by COVID-19 have resulted in reduced receipts and substantially increased public spending. Meanwhile, COVID-19-related restrictions on activity during the fiscal year, as well as the lockdown in the first quarter, limited tax receipts in January and February.
“Central government receipts fell 1.4% year-on-year in February. VAT receipts were down 12.0% 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 4.5% year-on-year in February, have been reduced by the temporary raising of the threshold since July. However, the ONS reported that self-assessed income tax receipts were up 26.2% year-on-year in February 2021 while PAYE income tax was up 4.0% year-on-year. Corporation tax receipts rose 0.2% year-on-year.
“Meanwhile, central government expenditure increased 25.1% 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 schemes. The ONS reported that, in February, there was £3.8bn expenditure on coronavirus job support schemes
“The budget deficit amounted to £278.8bn over the first 11 months of fiscal year 2020/21, up from £50.6bn in April 2019 – February 2020. To put this into perspective, it is already up £224.0bn 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 £121.1bn more than the peak £157.7bn deficit seen 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 February 2021, central government expenditure was up 27.9% year-on-year and receipts were down 5.1% year-on-year. VAT receipts were down 11.1%, with companies allowed to defer VAT for a time and with the rate also temporarily reduced for the hospitality and leisure sectors. Corporation tax receipts were down 2.1% and income and capital gains tax receipts were up 1.3% year-on-year.
“Should the pattern of the first 11 months of fiscal year 2020/21 continue, the budget deficit (PSNBex) would come in around £318bn. It will likely ultimately come in higher than this as not only will the March shortfall be lifted by extra supportive measures and relatively limited economic activity due to the current restrictions on activity, but the ONS is yet to incorporate an estimate of the likely write-off of losses from the various government-backed COVID-19 loan schemes.
"Nevertheless, the Chancellor looks on course to at least meet the budget deficit of £354.6bn for 2020/21 set out by the OBR in the Budget at the start of this month.”