- The provisional 2020/21 deficit in the public finances (PSNBex) came in markedly below the revised target contained in March’s Budget.
- While the Office for Budget Responsibility (OBR) had forecast a budget deficit of £354.6bn in 2020/21 in the March Budget, the provisional outturn was £303.1bn (14.5% of GDP). Although below expectations, this was still the largest shortfall on record by and up from £57.1bn (2.6% of GDP) in 2019/20.
- However, there will undoubtedly be significant revisions to the data, and the Office for National Statistics (ONS) is yet to incorporate estimates of the likely level of write-offs from the various government-backed pandemic loan schemes. The OBR currently expects these to be around £27.2bn.
- The March public budget deficit amounted to £28.0bn. This was up significantly from a shortfall of £7.0bn in March 2020 and was the highest March shortfall since monthly records began in 1993.
- March’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 0.3% y/y in March, while central government expenditure rose 26.5% y/y.
- The Budget provided further major fiscal support for businesses and jobs in 2021/22 to try to ensure that the economy can overcome still-significant COVID-19 risks. Consequently, the OBR forecasts the budget deficit to be as high as £233.9bn in 2021/22. This is based on projected GDP growth of 4.0% in 2021, which now looks a very pessimistic view.
- The EY ITEM Club believes the 2021/22 budget deficit could come in significantly lower – around £215bn (9.2% of GDP) – given a more optimistic view about the UK growth outlook for 2021.
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 significantly deeper year-on-year shortfall in March, amounting to £28.0bn. This was the largest March deficit on record and compared to a shortfall of £7.0bn in March 2020. The consensus forecast had been for a deficit of £22.5bn in March.
“Meanwhile, February’s shortfall was revised down to £16.0bn from the previously reported deficit of £19.1bn. Even so, this was still the largest February shortfall since records began in 1993 and up from a deficit of £1.5bn in February 2020.
“The Government’s measures to support businesses and jobs affected by COVID-19 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.
“Central government receipts fell 0.3% year-on-year in March. VAT receipts were down 0.5% year-on-year and are currently being limited by the temporary VAT cut for the hospitality and leisure sectors as well as the closure of non-essential retailers. However, income and capital gains tax receipts rose 9.0% year-on-year in March, as earnings have increased recently.
“Meanwhile, central government expenditure increased 26.5% year-on-year in March 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 and the ONS reported that central government paid £7.2bn in subsidies to businesses and households in March 2021, £3.0bn more than in March 2020. These additional payments included the cost of the job furlough schemes, with an additional £1.6bn spent on the Coronavirus Job Retention Scheme (CJRS) compared with March 2020, the first month it was available.
“The budget deficit amounted to a record £303.1bn (14.5% of GDP) over fiscal year 2020/21, up from £57.1bn (2.6% of GDP) in 2019/20. To put this into perspective, it is £248.3bn more than the PSNBex of £54.8bn forecast for 2020/21 by the Office for Budget Responsibility in the March 2020 Budget. It is also £145.4bn more than the peak £157.7bn (10.1% of GDP) deficit in 2009/10 seen during the financial crisis.
“During fiscal year 2020/21, central government expenditure rose 27.5% year-on-year and receipts fell 4.5% year-on-year. VAT receipts were down 9.2%, with companies allowed to defer VAT for a time and also temporarily reduced for the hospitality and leisure sectors. Corporation tax receipts were down 1.8% and income and capital gains tax receipts were up 2.7% year-on-year."