By Scott Simmonds, researcher
The Office for National Statistics's (ONS) release of the public sector finances today reveals the financial impact a year of coronavirus restrictions has had on the economy and subsequently public sector borrowing. It may not be as bad as expected, but the figures still make grim reading for taxpayers.
Here are the key takeaways:
- The ONS estimates that public sector net borrowing in 2020-2021 reached £300.3 billion (which equates to 14.3 per cent of UK GDP – the highest since WW2, when it was 15.2 per cent in 1945-1946). This is almost double the previous peak of £157.7 billion borrowed during the economic downturn in 2009-2010.
- Government borrowing continues with an additional £31.7 billion of estimated borrowing added in April 2021 – £15.6 billion less than April 2020, the second highest April borrowing on record.
- OBR official forecasts suggest borrowing will continue, and reach £233.9 billion in 2021-2022. It should be noted that the government is estimated to have borrowed £27.1 billion less than the £327.4 billion previously expected by the OBR’s Economic and Fiscal outlook – March 2021 on a like-for-like basis.
- Government support for businesses and individuals during the pandemic contributed to an increase of £204.1 billion (or 27.6 per cent) in day-to-day central government spending to £942.7 billion.
- Public sector net debt at the end of April 2021 was equivalent to 98.5 per cent of GDP - the highest since the early 1960s.
- Interest payments on central government debt were £5.2 billion in April 2021, £0.1 billion more than in April 2020. This payment was half a billion more than the government received in corporation tax and stamp duty receipts combined in April 2021.
Although government borrowing is estimated to be £27.1 billion less than the OBR officially forecast, providing the chancellor much needed fiscal breathing space, the public sector still borrowed over £300 billion to combat covid.
Let’s dive into the figures. Central government saw combined tax and National Insurance receipts in 2020-2021 fall by £32.7 billion (or 4.7 per cent) compared with the same period a year earlier - to £670 billion. This occurred as central government net borrowing increased by £253.5 billion - from £56.3 billion in FYE March 2020 to £309.8 billion in FYE 2021. This illustrates why public borrowing has ballooned over this period.
While the previous year saw borrowing rapidly increase, things did improve in April. Receipts were up in April 2021 and spending down on last year. Provisional April 2021 estimates of central government receipts were up £3.8 billion (or 7.0 per cent) compared with April 2020, totalling £58.0 billion, while central government bodies spent £95.9 billion, down £12.9 billion (or 11.9 per cent) from April 2020. This shows promise, but there is still much more work to be done to fix the public sector.
Indeed, some areas of government expenditure saw double-digit increases compared to a year earlier (Table 1). Increases in areas such as procurement and local government support may be seen as understandable given the extreme circumstances of the pandemic, but will need to be reduced over time. Another area that might raise eyebrows is the 10.6 per cent increase in central government expenditure on pay. Such a huge increase when borrowing large amounts seems reckless. Reductions in these should be taken into consideration before increasing taxes and adding to a tax burden already at a 70-year high.
It’s worth remembering that government debt to GDP has doubled since 2009, and reducing borrowing is not the same as reducing debt. Public sector net debt stood at £2,171.1 billion at the end of April 2021, an increase of £304.6 billion on a year earlier. Indeed, we estimate that the real national debt is closer to £9.6bn (or a whopping £143,000 per person).
In the long term, the government needs to start paying down this debt, and not just reduce borrowing while still adding to it. The interest payment to service this debt was £5.2 billion in April 2021 alone. This was more than the government took in stamp duty and corporation tax combined in the same month, showing that all borrowing has a price. It’s a price taxpayers can’t go on paying forever.