- Borrowing remains on track to come in around £25bn below the OBR’s full year forecast for 2021-2022. This reflects the impact of a stronger recovery, which has boosted revenues and lowered spending on government support schemes.
- The EY ITEM Club expects the OBR to judge part of the improvement as being persistent, rather than just a short-term development. But the Government’s decision to introduce a new health and social care levy suggests it won’t use any extra leeway to loosen the fiscal stance.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
"Public sector net borrowing (excluding public sector banks) was £20.5bn in August, £5.5bn lower than a year earlier. This meant borrowing over the first five months of fiscal year 2021-2022 totalled £93.8bn, £88.9bn down on a year earlier and well below the £125.7bn forecast by the OBR.
“While both revenues and spending have performed better than the OBR anticipated, receipts are responsible for the bulk of the borrowing undershoot. This reflects the recovery in activity being much stronger than the OBR’s very cautious near-term forecast. Given the OBR expected the recovery to be backloaded, the borrowing undershoots are likely to fall in the rest of fiscal year 2021-2022. But the EY ITEM Club still expects borrowing to come in at least £25bn below the OBR’s full-year forecast of £233.9bn.
“When delivering its updated forecasts on 27 October, the key question will be to what degree does the OBR deem the stronger-than-expected fiscal performance to be a short-term development driven by the recovery, or a more permanent improvement. The EY ITEM Club believes that a mix of the two is likely. The OBR’s current view that there will be long-run scarring to the economy from the pandemic of 3% of GDP looks very pessimistic and is a clear outlier. The Bank of England recently judged that scarring is likely to be closer to 1% of GDP, and there is a reasonable case that it could even be smaller. Should the OBR agree, its forecast revisions will give the Chancellor plenty of leeway against his mooted new fiscal rules. But his recent decision to introduce a new health and social care levy from next April suggests he’s unlikely to use this leeway to loosen the fiscal stance.”